I came across a superb knowledgebase article on RIM’s website that describes the encryption of the internal and external file systems on your BlackBerry. Internal means the internal memory and the external is your MicroSD card. It even specifies which folders on the memory card are encrypted.
The reason I mention this is because there are two gotchas that people run into with encrypting their memory card. First of all you need to realize that when you encrypt the memory card it will not automatically encrypt files if you transfer them off using USB mass storage support. Also when you transfer off encrypted files using USB mass storage they will not be readable. To deal with this you must use the built in media manager in desktop manager.
The second source of confusion stems from the different encryption modes. If you use device encryption then it will us a randomly generated device key to encrypt files. The problem is that you will not be able to read this memory card on any other device. If you use the Security Password mode then it will encrypt the files using the BlackBerry device password. This will allow you to transfer the card to another BlackBerry most of the time. If you use both then you need to combine both restrictions.
The knowledgebase article also has a great list of what content is encrypted on your internal memory.