Windows NT, Windows 2000 and XP all have the option to encrypt files. This is being used more and more, in particular by laptop users who are concerned about theft, or just general security.
The system used is called EFS, Encrypting File System and is very secure. A secure system means that data recovery can be equally difficult and does require unique keys for each hard drive. It is not possible to recreate these keys, even if one knew the original password. Standard data recover techniques will recover the files, but they will remain encrypted and useless. Even reinstalling the complete operating system, and doing an identical setup will not assist, as every key is unique.
An encrypted file cannot be taken to another PC with encryption enabled, as every system has a unique key. Thus removable disks can only be read on the original machine, or ones where the relevant encryption key has been specifically loaded. Encryption is not a general purpose routine, otherwise, it would not actually be worth anything. EFS has no back door, ie no way to overcome a problem of lost data without the relevant keys.
The password with EFS is only the start of the security. Some passwords can be broken with brute force, ie programs that try every combination. Given a short password, with only letters, this can be fairly quick, but throw in a few numbers, and other non text characters, and even on the worlds fastest computers they remain unbreakable.
The simple solution is to be prepared, and it is a very simple procedure to export the keys to another system, or floppy disk - as they are only a few KBs long. The following link explains the procedure.Certificate Exporting Keep them very very safe.
When the next Microsoft operating system, Vista, is released, it is thought that encryption will become more standard. Do take care to ensure that recovery procedures are thought about