You're hard disk is formatted with FAT32. Permissions can only be set on NTFS partitions. Either format your computer as NTFS and reinstall XP or use the convert command to change FAT32 to NTFS. Also, you will have to disable Simple File Sharing.
You will get the definitive answer from here i suppose: http://support.microsoft.com you will have to search for information about the guest account yourself though.
Simple file sharing can be changed in explorer by going to tools/folder options, view: then deselect "use simple file sharing (recommended)"
I turned off simple file sharing, but that didn't do anything. So I converted my FAT32 system to NTFS, and that seemed to fix it. Thanks everyone for your help.
But that is still odd though, that other normal users on the system had full read/write access on the entire computer...(even though it was FAT32).