Start out by identifying your device name. Insert the usb stick and run in a terminal:

dmesg

The output would be something like this:

........
........
[17028.141759] usb-storage: device found at 20
[17028.141772] usb-storage: waiting for device to settle before scanning
[17033.140314] usb-storage: device scan complete
[17033.141276] scsi 9:0:0:0: Direct-Access              Flash Disk       5.00 PQ: 0 ANSI: 2
[17033.185463] sd 9:0:0:0: [sdc] 1998848 512-byte hardware sectors (1023 MB)
[17033.186669] sd 9:0:0:0: [sdc] Write Protect is off
[17033.186682] sd 9:0:0:0: [sdc] Mode Sense: 0b 00 00 08
[17033.186688] sd 9:0:0:0: [sdc] Assuming drive cache: write through
[17033.194505] sd 9:0:0:0: [sdc] 1998848 512-byte hardware sectors (1023 MB)
[17033.196549] sd 9:0:0:0: [sdc] Write Protect is off
[17033.196563] sd 9:0:0:0: [sdc] Mode Sense: 0b 00 00 08
[17033.196569] sd 9:0:0:0: [sdc] Assuming drive cache: write through
[17033.197444]  sdc: sdc1
[17033.199662] sd 9:0:0:0: [sdc] Attached SCSI removable disk
[17033.200242] sd 9:0:0:0: Attached scsi generic sg3 type 0
........
........

This device is called /dev/sdc and the partition is sdc1.

Unmount the device so we can massage the partitions on it :)

Use whatever tool you like to format the stick into a ext3 partition. WARNING THIS WILL DELETE ALL DATA ON THE STICK!!

Install cryptsetup:

sudo apt-get install cryptsetup

Now create the encrypted partiton:

sudo luksformat -t ext3 /dev/sdc1
Creating encrypted device on /dev/sdc1...

WARNING!
========
This will overwrite data on /dev/sdc1 irrevocably.

Are you sure? (Type uppercase yes): YES                   
Enter LUKS passphrase: 
Verify passphrase: 
Command successful.
Please enter your passphrase again to verify it
Enter LUKS passphrase: 
key slot 0 unlocked.
Command successful.
mke2fs 1.41.3 (12-Oct-2008)
Filesystem label=
OS type: Linux
Block size=4096 (log=2)
Fragment size=4096 (log=2)
62208 inodes, 248742 blocks
12437 blocks (5.00%) reserved for the super user
First data block=0
Maximum filesystem blocks=255852544
8 block groups
32768 blocks per group, 32768 fragments per group
7776 inodes per group
Superblock backups stored on blocks: 
	32768, 98304, 163840, 229376

Writing inode tables: done                            
Creating journal (4096 blocks): done
Writing superblocks and filesystem accounting information: done

This filesystem will be automatically checked every 29 mounts or
180 days, whichever comes first.  Use tune2fs -c or -i to override.

É voila you now have an encrypted usb stick. Now test it out by ejecting it and plug it back in:

Enter your password and you should see it get mounted:

And do I have to remind you that if you loose the unlock password you will never recover your data on the stick....?? ;)


Source: http://www.fabianrodriguez.com/blog/2009/01/21/easy-removable-storage-encryption-that-works-with-hardy-and-intrepid///