You cannot password protect individual folders in XP. You restrict access by assigning
permissions to drives, folders and files.
To do this, you must be running NTFS as your file system on the drive in question. If your hard disk/partition is not NTFS you will need to convert it. To do this, open a Command Prompt window and enter the following command:
CONVERT X: /FS:NTFS
Where X: is the drive letter you wish to convert. You may also want to see http://www.aumha.org/a/ntfscvt.htm (dead link) to ensure that you’re getting the optimal conversion.
After this step is completed and you’ve rebooted the computer, if necessary:
XP PRO: In Windows Explorer, go to Tools, Folder Options, View and uncheck Use Simple File Sharing. Now, when you right click on a drive, folder or file (on an NTFS partition) and select Properties, you’ll see a Security tab. Here you can assign or deny permissions based on user name or user group membership.
XP Home: By default, you can only make files and folders under My Documents “private”. This is done by right clicking a folder or file and selecting Properties, Sharing. To change the permissions on other folders, you need to boot the computer to Safe Mode and log in on the built in Administrator account. In this mode, you’ll see the Security tab in Properties, and you can assign permissions based on user name or group membership.
HOW TO: Set, View, Change, or Remove File and Folder Permissions in Windows XP
HOW TO: Set, View, Change, or Remove Special Permissions for Files and Folders
HOW TO: Disable Simplified Sharing and Password-Protect a Shared Folder in Windows XP