I highly recommend TrueCrypt . It can create an encrypted partition as a file or take over the whole disk such as a USB flash drive. It is straightfoward to use. Mount the encrypted partition on drive letter and enter your password. Any files saved to that drive is encrypted. Unmount the partition when done.

An alternative is the encrypted file system built-in Windows XP or 2000. Encrypting a file or directory is as easy as right click on the file and check "Encrypt this file" in the detail attribute window. The user needs to be diligent on backing up of his keys. If the users' profile got corrupted and keys were not backed up, the files are nearly impossible to recover. I have seen this happen...