I haven't tried using a drive other than C, so I can't say if this should work. I personally think running the system on a drive other than C: seems risky, but like you indicate, I was burned way back in the day with apps not performing as I expected when I made that type of change.
As for getting AIR installed, can you try creating a new and temporary user account and see if installing via the new account helps? Once installed, it should work for all existing accounts.
