The XMLTOCURSOR() require MSXML 3.0. You can get the latest version at http://www.microsoft.com/downloads/details.aspx?FamilyID=4a3ad088-a893-4f0b-a932-5e024e74519f&displaylang=en
I would also recommend to use inline schema in CURSORTOXML(). It'll make converting XML back with XMLTOCURSOR() simpler.

CURSORTOXML('cust', 'cust.xml', 1, 512, 0, '1')

What field type are you using to store encrypted data? IIRC, the binary data will only processed correctly by CURSORTOXML() if it's stored in blob or Memo/binary.

>I created an XML file like this:
>
>CURSORTOXML('cust', 'cust.xml', 1, 512, 0, 'cust.xld')
>
>...and now I try to do this:
>
>XMLTOCURSOR("c:\vv\cust.xml","curcust",512)
>
>..and its failing. I have serveral files and they're all failing.
>
>Sometimes I see this: "msxml3.dll: The sytem cannot locate the object specified."
>
>The other problem is that some of the data was encrypted...so I'll see an error
>like "XML Parse error: An invalid character was found in text content. Line 11933, Position 24," - then says the field name and the encrypted jibberish that's there.