+1 on TrueCrypt, but one point of clarification. The machine that you want to use the thumbdrive on would NOT need TrueCrypt installed. You can copy the TrueCrypt binaries to the thumbdrive itself and launch it from there without installing to the host machine.

TrueCrypt isn't full volume encryption though. You create a file as big as you want, lets say 100MB, and that file becomes a password protected volume that you mount in Windows. It simply appears as another drive. You can move that 100MB TrueCrypt volume wherever you want: put it on your laptop, your desktop, thumbdrive, etc.

I have a 20MB TrueCrypt volume that I keep sensitive documents in, and I keep the volume inside of one of my Live Sync folders, so the TrueCrypt volume keeps itself in sync on all of my machines.

Another approach is true full volume encryption, like BitLocker (built into Windows Vista and 7). With BitLocker To Go (Windows 7 only) you can encrypt an entire thumbdrive so that it prompts you for a password as soon you insert the drive. The only problem with that is if you insert a BitLocker'd thumbdrive in an XP or Vista machine, you will only have read only access to the thumdrive. Only Windows 7 can write to a BitLocker enabled thumbdrive.