"In WinXP, if you password protect a file, the file IS ENCRYPTED"
I knew that. Sorry if I appeared to suggest otherwise.

As for the hardware protection against errors, you still get that with an encrypted driver. The errors are corrected (as you say, by the hardware) before the encryption software has to decipher it. Data errors are completely unacceptable from the disk whether or not encryption is involved. Think about it - a single bit error while reading the code for an ordinary Windows executable could cause havoc. It really doesn't happen significantly often.
(memory errors in high throughput servers are a different matter, that's why they use ECC memory)

Anahata