When it comes to .Net and Windows XP Encryption, don't do it.
Here at work we are very concerned about data security. A recent issue that came up was the security of business data that was stored on laptops and home computers.
In the past, I would archive the files I need and copy them onto a USB key or CDRW so I could bring them home and work on them. Then, when I'm ready to work at home or on my laptop, I restore the archive to my hard drive and I'm good to go.
In an attempt to be a 'secure' employee, I began password protecting my archives. Winrar is a really good tool for this, since it also 128-bit encrypts the entire archive when it is password protected. Then, using Windows XP file encryption, I encrypted my working folder. Here's where the problems started.
First, MSDE (MS SQL Server Developer Edition) could not read the encrypted data files. I thought perhaps SQL Server had just gotten confused, so I detached the database with the attention of attaching it again. However, SQL server could not attach to the encrypted database (if I remember correctly, it told me that it was an invalid .mdf file). As soon as I unencrypted the data files, SQL Server attached it without complaint.
Second, when I tried to run my ASP.Net application, I kept getting an error that said access was denied to one of the assemblies that I had written. It turned out that it couldn't read the encrypted .dll files. Once I unencrypted my work folder, everything worked out great.
So, to sum it all up, when you are working with MSDE and ASP.Net, don't use Windows XP file encryption.