There are a couple of different ways to go with this.
You can buy specific flash drives that have built-in password protection. They tend to be a little pricey, but in some ways, they are almost perfect for this kind of an application.
Frankly, I don’t recommend them. I find there are other solutions that are a little bit more flexible and less costly. For instance, you could encrypt those files that you’re putting on the flash drive individually, using either a zip file with a password, or a tool like AXCrypt or TrueCrypt.
Zip files and password-protected files like AxCrypt provide the kind of security you’re looking for, but you need to first decrypt the files to read them. In other words, you take the encrypted file sitting on your flash drive, decrypt it to a local copy on your hard drive, read it, and then delete the file.
If you need to update the file, you need to unencrypt the files from the flash drive to your hard drive, make your changes, re-encrypt it, put it back on the flash drive, and then delete the copies that are on the hard drive. It’s fairly complex process to make sure it’s as secure as you really want it to be.
The neat thing about this approach is that you create a TrueCrypt volume on that flash drive. This can take up the entire flash drive, or some portion of it. Ultimately, that depends on the size of your files, how much room you want to be encrypted, how much unencrypted space you want left over, and, of course, the size of the drive.
Once created, you can mount the drive when you insert the flash drive. You need to specify a password, but once entered, that volume then appears as an additional unencrypted drive.
Once mounted, everything you read is unencrypted automatically. Everything you write and update is automatically encrypted. When you’re done, you dismount it, the Truecrypt volume file is updated on your flash drive, and you’re good to go.
The downside to TrueCrypt is that it must be installed by an administrator on all the machines involved. Once it’s installed, however, non-administrators can use it.
Choosing encrypting technology
There is actually no generic way to password-protect a flash drive or folder in any secure way. In fact, I have an article specifically about password protecting a folder on Ask Leo! that goes into what I’ve talked about here a little more.
So the short answer is: you need to look into some encrypting technology of your own. Everything I’ve mentioned is free. If you’re willing to spend some money, there are some flash drives that include encryption. Whether they’d be appropriate for you in terms of functionality and price is something you’ll need to look into.