One of the downsides of a USB drive is that it is very easy to lose. If you store confidential data on the drive, this is even more concerning. If a person finds your USB drive, all they have to do is plug it in.
Windows 7 includes a feature called Bitlocker To Go which allows you to encrypt the contents of a USB drive and restrict access with a password. In order to decrypt and view the data, an individual would require the password.
To set up Bitlocker To Go, insert the USB drive, right click on it and select the Turn on Bitlocker option. Once Bitlocker is initialized, you will be prompted to type in a password to unlock the drive. You will also be prompted to create a recovery key that can be used in the event that you forget the password.