I corresponded a little more the 1Passwd folks concerning security of the 1Passwd bookmarklet after it synchronizes to your iPhone. He explained they use 448 Bit blowfish encryption. There is more. Here is an excerpt from Dave Teare's explanation.
"Re: your questions about security and hackability, all your confidential information is encrypted. On your Mac, it is stored in Apple's Keychain, which uses Triple-DES encryption to secure your confidential data. On the iPhone, we did not have access to the keychain, so we used Blowfish to encrypt your data using 448 bits, and we do other cool things like using Cipher-Block-Chaining and randomized Salt to keep your data extra secure. We use OpenSSL to perform the Blowfish algorithm. OpenSSL is open source and is installed on hundreds of millions of machines worldwide."
I've been playing more with the 1Passwd data file on my iPhone and had no problems at all. The developers explain it in more detail at their blog.