TrueCrypt , open source disk encryption software for Microsoft Windows XP/2000/2003 and Linux. TrueCrypt is a system for establishing and maintaining an on-the-fly-encrypted volume (data storage device). On-the-fly encryption means that data are automatically encrypted or decrypted right before they are loaded or saved, without any user intervention.

Files that is stored on this virtual drive is automatically encrypted on-the-fly, and can only be accessed while the drive is mounted with the correct password or key.

The encryption algorithms supported by TrueCrypt include AES, Serpent, and Twofish. If you lost your password, the only way to recover your files is to try to “crack” the password or the key, TrueCrypt does not save password to the disk.

For more info on TrueCrypt, visit http://www.truecrypt.org/docs/
Download TrueCrypt Free: http://www.truecrypt.org/downloads.php
Tutorial on how to use use TrueCrypt, visit Tutorial Part1, Part2, Part3, Part4, Part5.

I’ve been using TrueCrypt for quite awhile now with my USB thumb drive and USB external drive. TrueCrypt is truly an amazing solution, all encryption and decryption happens in realtime and I can´t see any slowdowns so far.