1) No. Microsoft won't allow it.
2)
VLC will play pretty much anything. Also check out
3ivx.
The AVI files are probably some version of DivX. The MPEG files are probably MPEG-2, for which there is a plug-in you can get from Apple for about $20.
3) To hide or password protect files, I would use Disk Copy. Select "New > Blank Image", pick a name, a size, select AES-128 as the encryption and save the file somewhere. You should be prompted to set a password for this file.
The size is rather important. Make sure you pick a size that allows whatever files you want to save on this disk image to fit.
When you want to mount this disk image, simply double-click on the saved file and enter the password.