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The password you provide is hashed ( SHA256 ) and saved into the encrypted file to check if the password provided is correct.This algorithm has limitations in general more the numbers of relative characters in the password to plaintext more secure will be the encryption.
XOR encrypt has a 3.5 of 5 editors rating from softpedia
http://www.softpedia.com/get/Security/Encrypting/XOR-Encrypt.shtml
Flash/PHP adaptation of the XTEA encryptionalgorithm. Allows encryption/decryption of sensitive data using 128-bit key. May be used for network data (HTTP) or offline for implementations like secure CD-ROM projects.