Encryption is absolutely essential, especially if you’re the kind of person that carries their USB stick around as if it’s your car keys or your lipstick. USB sticks are so small that they are easily lost and they are also easily stolen. Just think of all the information that gets stored on one of these things. If the person was honest, it might not be so bad, but if the person wasn’t honest,.well then it could be catastrophic for you depending on the type of information you transport. Identity theft would only be the start of your problems.
Truecrypt will put an encrypted container on the USB stick along with the Truecrypt encryption program to encrypt and unencrypt your files. If anyone was to steal the USB stick or find it (if you dropped it), all they would find on the drive would be an encrypted container which, without the password, is absolutely useless and unbreakable.
You also might want to put (on the unencrypted part of the drive) a text file with your name, email address and phone number so if a Good Samaritan were to come along, they would have a chance to do the right thing and return your property to you.
Free download here: http://www.truecrypt.org/downloads