Taken directly from the Help file for Word 2007:
Click the Microsoft Office Button, and then click Save As.
Click Tools, and then click General Options.
Do one or both of the following:
If you want reviewers to enter a password before they can view the document, type a password in the Password to open box.
If you want reviewers to enter a password before they can save changes to the document, type a password in the Password to modify box
Chris