Recent Windows operating systems like XP, Vista as well as Windows 7 do not use passwords to protect resources like files and folders. Instead, every resource has an associated DACL, a Discretionary Access Control List, which determines whether or not a user has the right to access a resource, and if so, with which level of permissions (read/write/execute for example). The DACL approach is believed to be safer and better manageable.
However, in some situation it may be useful to password protect folders, such as for instance when your Windows XP account/profile has no password associated , the Windows XP account/profile is being shared, or when you want to make it impossible for administrator to have access to your data by all means. Windows XP built-in methods to password protect folders make use of encryption; pure password-protection is left to third party tools.