I recently purchased a 1GB USB Flash Driver for $13 after rebates, including shipping.  I'm pretty happy about that.  However I already have desires for a larger drive.

I found that I can use TrueCrypt which is small app that sits on the flash drive along with a truecrypt volume file which can be mounted as a drive.

See traveler mode.   The only catch is that the user must have administrator rights.

It even can preconfigure teh flash drives autorun.inf file so that mounting the encrypted volume is automation (after entering the password of course).