This works in 2000. I don't have an XP box that I can test it on.
Richt click, go to Properties. Click advanced (down by the attributes) which pops up another window. There is a check box for "Encrypt contents to secure data"
That type of file encryption is different from password protecting a folder in windows. The encryption your taking about is to prevent another machine on a network, from opening sensitive documents.
I believe what he's talking about is actually password protecting a folder in windows on a single PC. IF this is the case, then I'd suggest using a Software Based, File & Folder password protectin program.
Use AxCrypt. It's open source and the crypto algorithms are pretty good. Some of the other common ones are not there presumably due to licensing issues.