Great advice on using encrypted disk images

Tidbits has an excellent essay on using encrpyted disk images. I particularly like the technique that requests a password on startup -- storing the password in the keychain is a bad idea, but having to remember to open the image each startup is a nuisance ...

TidBITS: Unintelligible Garbage Is Your Friend

... Add the encrypted disk image file to your login items. Choose System Preferences > Accounts and click the Login Items tab. Click the plus sign button, find the .sparseimage file, select it, and click Add (or just drag the file into the Login Items tab). Now, whenever you restart or log in to your account, your Mac will ask you for your decryption password and mount the virtual disk on your Desktop. You can eject the virtual disk to protect the files if you're putting your computer to sleep, or even just stepping away from your desk.

For extra convenience, put an alias to the virtual disk where you used to keep the unencrypted files, so it behaves just like the folder it's replacing. If you give it the same name, other programs that expect the unencrypted folder to be there should still continue to work while the volume is mounted. If your encrypted volume isn't mounted, trying to open the alias will prompt you for your password...