Q1 -- If account1 downloads an application/software then it should not be downloaded on account2 and vice versa
Downloads are not account specific in XP, regardless of what the file type is.
Q2 -- Both accounts can share some applications/softwares according to their needs like media player etc. so they don't waste space by downloading same applications/softwares on each account
Most programs install once and are available to all users. Only a handful have the option to install for one specific user.
Q3 -- When I made the account2 it had all the applications that account1 already had so are they sharing the apps or each is using separate disk space for same apps?
They are using the same installation for those applications. The application is only installed once unless, as specified above, the program needs to be installed for each user, which is very uncommon.
Q4 -- Except from sharing softwares according to need how can I have total privacy between the accounts?
Guest accounts are not private and have very little permissions for access to many things on the computer.
An administrator account can access most anything on the computer and view, control, modify, delete, etc. An administrator account can also modify most other accounts present on the system.
A normal user account has more permissions than a guest account, but still fewer than the administrator account. Files stored in the normal users documents folder have permissions set for that user only in most cases so other normal user accounts can't access them.
Between different accounts (both admin and normal) system settings, bookmarks/favorites, documents, etc. are normally not shared. However, with a few simple steps it's easy to circumvent this separation. There is no 100% way to separate the two and have the information, programs, etc. secure from the other accounts.
