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Note: This how to uses screens that will look similar in MacOS 10.3.x and MacOS 10.4.x. MacOS 10.2.x screens will look a little different but the same principals apply.
What is an encrypted disk image?
It is a file that is 128-bit encrypted that when double clicked on will prompt for a password. Once authenticated the disk image will mount on your Mac like if you had inserted a CD or USB flash drive. Once you have copied data to the mounted disk image you can unmount the image causing it to require a password to view its contents again. This is a great way to secure files you don't want others to see.
How to create an encrypted disk image.
Launch the Disk utility app under /Applications/Utilities/Disk utility.
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Click on the file menu and select New blank image. Alternatively you may have a new image icon on the toolbar of disk utility. It is an icon of a file with a hard drive and a plus symbol.

Select the size you want the image to be. There are many presets but I recommend using the 610MB 74min CD size. This will allow you to have plenty of room and will burn nicely to a CD if you want to back the data up.

Make sure you select the 128 bit under the encryption menu. Name your Image and save it someplace in your home folder.

Once you click save it will prompt you for a password. Note: Make sure you uncheck save password in keychain. If you don't it defeats the purpose since anybody could walk up to your Mac and mount the image.

After the image is made it will automatically mount for the first time. You can now copy data to the image. When you are finished make sure you unmount the image by dragging its icon to the trash or selecting the eject button next to its icon in the quick access column of any finder window.

To mount the image again simply double click on the disk image you created. In the screenshot below my disk image is named personal.dmg at the top of the list.

It will prompt you for your password.

Note: Remember to unmount your disk image whenever you are finished with it.
How to burn your disk image to a CD.
There are two methods you can use. a. burn the encrypted disk image to a CD to preserve the privacy of the data. b. burn the contents of the disk image removing any privacy.
To burn the disk image simply drag the image file to a writable CD icon in the finder . Note you do not want to drag the mounted version but just the .dmg file.
To burn the contents to a CD use the Disk utility app. Select the image from the left quick access column and click the burn icon in the toolbar. Note: It looks like a radiation symbol.