How to set a password on a folder in Windows XP?

"Need more info to help you determine the best option. Like, do you need to encrypt a folder for your use only? Are you sharing the files in the folder w/ others, who are also editing those files? Are you sharing across a LAN or WAN? etc.

Absent that info, I'll throw out some random ideas! Here goes...

EFS (encrypting file system) - use that if you have XP Pro (not Home); you'll be able to access files in a given encrypted directory transparently, as the decryption key is tied to your Windows login. (Caution - take special care when backing up EFS-encrypted files to also back up the EFS recovery key!)
Full disk encryption programs, including: TrueCrypt, PGP WDE, etc. Rather than just encryptiong a folder, you'd either encrypt your entire disk (including the operating system itself), or you'd create a virtual drive (mountable as a drive letter), or encrypt a partition on your machine.
If you're really interested in secure file transfer, then you can use a tool like PGP Desktop or SecureZip for this purpose (or in addition to the above ideas... in other words, the data is encrypted while on your machine as well as in transit)."

"Create Your Password Protected Folder

Before you get started you need to create a folder that will house your password protected folder, this is just an ordinary folder and can be located anywhere and named anything.Navigate into your newly created folder and create a new Text Document. This can easily be done from the context menu.

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Open the document, now paste the following code into the contents of the document:

cls
@ECHO OFF
title Folder Private
if EXIST ""HTG Locker"" goto UNLOCK
if NOT EXIST Private goto MDLOCKER
:CONFIRM
echo Are you sure you want to lock the folder(Y/N)
set/p ""cho=>""
if %cho%==Y goto LOCK
if %cho%==y goto LOCK
if %cho%==n goto END
if %cho%==N goto END
echo Invalid choice.
goto CONFIRM
:LOCK
ren Private ""HTG Locker""
attrib +h +s ""HTG Locker""
echo Folder locked
goto End
:UNLOCK
echo Enter password to unlock folder
set/p ""pass=>""
if NOT %pass%== PASSWORD_GOES_HERE goto FAIL
attrib -h -s ""HTG Locker""
ren ""HTG Locker"" Private
echo Folder Unlocked successfully
goto End
:FAIL
echo Invalid password
goto end
:MDLOCKER
md Private
echo Private created successfully
goto End
:End

Change the PASSWORD_GOES_HERE text to the password you want to set. Now go ahead and save the file as locker.bat.Once the file is saved as a batch file you can delete the original text file.Now run your batch file by double clicking on it–the first time you run it, it will create a folder called Private. This is where you can store all your secret things. When you have finished adding all your stuff to the Private folder, run locker.bat again.This time you will be asked if you sure that you want to lock the folder, press the “Y” key and hit enter to lock your folder.You will see that your Private folder quickly disappears.If you run the script yet again, you will prompted for a password.
If you enter the same password as you set in the script the Private folder will reappear if you enter the incorrect password the script will just Terminate.hope its help."

You can use Folder Password Expert to set a password for a folder in Windows.