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No, you can't do that with XP itself.
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Not true, there are 2 methods, the first only works in XP pro, not home, but it does work in versions of windows since ME (so long as you add it in the windows components )
Decide if you want the currently logged in used to be able to access the files or a different user. if a different user (otherwise the files will be transparently accessible when you are logged in)
i create a test account with a strong password that i fast user switch to, to gain access.
Create a User, make a password, log in as that user
Create a folder say
C:\protected
click properties, advanced, select "encrypt" apply it to the folder and contents,
Move the files you wish to create in there. if you have the colour coded option in explorer they should now appear green
now you can go to the encrypt options and select the details (but only a file at at time, and not folders) and add or remove users who you want to be able to access, if you create new accounts for this, they must log in at least once to make the certificate an become trusted.
Logout, go back to your normal account, and you won't be able to access those files, it wont prompt for a password, just deny you.
If you encrypted the root folder the files should disappear too, needs two levels directory for that i believe.
so C:\foo contains c:\foo\bar both folders are set to encrypt if the files are in bar you shouldn't be able to see them
its not very elegant, but it works.
Second method is to use the zip folder compression, create a compressed folder, then put the files in it, open the folder, go to the file option and select "Add a password" that should work in both home and pro versions of XP. it'll prompt for a password on access. This option seems to disappear if you install a zip tool that overrides the zip folders.
re-enable it with
regsvr32 %windir%\system32\zipfldr.dll
Create a zip file thats either empty or contains the files you want to encrypt.
open it , it should open as a folder, unless you have an archiving tool that overrides it, in which case you may have to right click the zip file and change the open with to "compressed folders" instead of winzip etc.The reopen it, copy the files in, and select "Add a password"
The later is just basically a encrypted zip file, but it does work as a folder if you use XPs default settings.