For your question on File/Folder permissions in XP Home:
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 to ensure that you're getting the optimal conversion.
After this step is completed and you've rebooted the computer, if necessary:
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
http://support.microsoft.com/default.aspx?scid=kb;en-us;308418
HOW TO: Set, View, Change, or Remove Special Permissions for Files and Folders
http://support.microsoft.com/default.aspx?scid=kb;EN-US;308419
HOW TO: Disable Simplified Sharing and Password-Protect a Shared Folder in Windows XP
http://support.microsoft.com/default.aspx?scid=kb;EN-US;307874
NOTE: Do NOT use DENY permissions for Groups of users. If you need to use Deny, apply it to specific usernames, not groups. For example, if you Deny permission to a particular file or folder for the Users group, even Administrators will not be able to access this file, since Administrators are also members of the Users group. When ever possible, uncheck Allow, rather than Deny.