A Keyfile is essentially just a digital key that locks and unlocks the TrueCrypt containers. It can be pretty much anything you want; including MP3s, Images, Word Docs,etc. I use JPEG and PNG images as my "digital key." I send out the photos to others and they already have the key in their possession and don't even realize it. I'll send an encrypted file and tell them to unlock it with the baby pictures I sent the week before. Pretty stealthy, huh?
Well, to use keyfiles, it is pretty easy and requires just a few clicks.
First, make your new TrueCrypt Volume.
When you reach the Password screen, select "Use keyfiles." Note, you can also use Passwords in addition to keyfiles. If you are paranoid, you can use both. In my example, I just leave the passwords blank and rely completely on the keyfiles to lock and unlock my secured container.
Next, add your key file(s). You can use multiple files as your set of keys. Here, I choose an jpeg image.
That is pretty much it. To unlock a container, simply check the "Use keyfiles" when you try to mount the container. If you don't have the keyfiles in your bookmark, you can click on the button next to the checkbox labelled "Keyfiles..." to select your key file.
As you can see, TrueCrypt is an amazingly powerful and feature rich encryption. Using keyfiles gives us a novel way of sending and storing encrypted cointainers.