You can encrypt the files/folders with password if the drive doesn't support encryption. Since drives with encryption feature are costly, you can use software to encrypt the files on drives. For example, TrueCrypt, 7 zip, Kakasoft Folder Protector are all good encryption software.
You would either encrypt the data, or and, encrypt the folder or hard drive, flash drive, etc.
The Vista tool used to encrypt an entire hard drive is BitLocker Encryption.
I've used Kakasoft Folder Protector for file encryption. It adopts 256-bit AES encryption technology and is able to encrypt files on computer or drive.
In general, TrueCrypt is considered to be one of the best encryption tools around. You can even encrypt a separate partition on your hard drive.
BitLocker Drive Encryption
Since there's no BitLocker feature in Windows XP, you can only use 3rd party software to encrypt your drive. You can try Kakasoft Advanced Folder Encryption, which is also good at encrypting files/folders on drive and hiding hard drive on computer. You can find it here: http://www.kakasoft.com/folder-encryption/
Kakasoft Advanced Folder Encryption has a function that helps you to hide a entire hard drive. If you need it, you can visit their site: http://www.kakasoft.com/folder-encryption/how-to-encrypt-files.html
For some time it has been common practice to protect and tansport a key for DES encryption with triple-DES (3DES). The function follows an encrypt-decrypt-encrypt (EDE) sequence. Decrypt sequence is simply the same (encrypt) operation with the keys reversed.
manual encryption
Since you are using Win 7, you can encrypt entire hard drive with BitLocker. Search "BitLocker" on google, you can get many how-tos about encrypting drive. If you don't want to encrypt the drive or you are afraid you will lose all content in drive when forgetting the password, you can also use third party software such as Kakasoft Advanced Folder Encryption to lock and hide drive with password.
Yes, you can use free file encryption software to encrypt files for free.Winrar, TrueCrypt and Kakasoft Folder Protector all allow you to encrypt files for free.
It is an encryption process that uses a public and private key pair to encrypt/decrypt data.