TrueCrypt

EDIT 8/23/08: After further testing, it looks like formatting your USB thumb drive with NTFS introduces a significant performance hit. Your drive will become very slow if you do this, so I apologize that I did not thoroughly test this before I wrote this post.

So, please skip the entire first portion of this post, Format With NTFS, and start with the second portion, Giving Your USB Drive A Drive Letter.