I use a smart card reader to encrpyt my files on XP. None of my system will work without the smartcard, if it's removed then the system goes into hibernate and so cannot be accessed... [Disable the Power button, and you're away! I know that you can get a pre-boot initialising encryption system [Win 9x etc.. being DOS based, not hard to do...] As for encryption, Steganos Security Suite [ http://www.steganos.com/./en/ ] will do on the fly encryption and steganographic disguising... [Hiding files in other files.]
I've used it, and found it to be superb.

Maybe someone can recommend a better system...

Hope this gives some ideas! Good luck!