Similar to Microsoft Windows XP and Windows Vista does Windows 7 folder protection not occur by means of passwords but rather user authentication, which generally demands a password to logon to a Windows system. There are a number of workarounds including third-party tools such as WinRAR or WinZip which let you compress and password protect a folder.
In a Windows Domain network you may protect folders using the guest account with a password as outlined in How to Password Protect a Network Share Folder. Yet, in a Windows Workgroup I wouldn’t choose that approach for it may lead to significant administrative overhead, or security through obscurity.
Alternatively to compression or the guest account trick you can apply EFS Windows Encrypting File System to password any number of folders if you own a flagship edition of Windows Vista like Ultimate; users of Windows 7 Starter, Home Basic and Home Premium editions will be limited to decryption operations though.
A tool which offers pure password protection in Windows 7 is shown in Bright Hub’s article Folder Lock: Password Protection & File Encryption. The software is perfectly capable of encrypting your folders so that only the correct password will start the decryption process, but what really differentiates Folder Lock is that the tool also offers password protection without encryption or compression.
If you need more than one password the guest account trick isn’t for you. If you don’t want to spend money for folder password protection offered by the third-party tools, and if you neither intend to purchase or upgrade to the Windows 7 flagship edition then you may to check out True Crypt, a powerful free encryption suite; the current version of True Crypt does support Windows 7 of course.
The Bottom Line:
Make sure you always remember your password for the secured folder, and additionally backup your EFS key if you use Microsoft’s built-in encryption. Otherwise your data is permanently lost if you forget the password or if the EFS key gets corrupted.
I recommend you skim trough the referenced five articles of the How to Password Protect-series for more background information and details regarding the particular workarounds.