An Encrypted Space is a space protected with a password that resides on the Mac's hard disk, external disk, or a USB drive, where the user can safely store documents, files, and folders to prevent access from other users. The Space will show up as a volume on the users desktop. When the Space is locked, the content of the space is secure. When the Space is unlocked, the user can copy, move and delete files as she/he would on any normal hard disk.
Protect Files automatically optimizes the enclosed disk image to reclaim unused space every time the Space is used. By default, Protect Files creates 128-bit AES Encrypted Spaces. However for even stronger encryption, the user may optionally specify 256-bit AES encryption in the applications preferences.
Protect Files leverage Mac OS X technology to create disk images with AES encryption, which is one of the most secure encryption methods and widely adopted by many governments. See Security section of Advanced Encryption Standard at Wikipedia to learn more.