In the Home edition of Windows 7, if you right click on any folder, select Properties, and then on the General tab, click on Advanced, you'll see an option 'Encrypt contents to secure data' which is grayed out.
. . . in order to get around this limitation, you can download NCH's MEO file encryption software, which is free. See: http://www.nchsoftware.com/encrypt/
After installing the software, click on options, and select a folder to hold the encrypted files that you'll create with the meo extension.
. . . then just select the folder you want to encrypt, enter and confirm a password and then it will be created in the output folder with an extension, .meo. You'll need to delete the source folder.