DO NOT ENABLE FILEVAULT!!!! If you do, you are in for a would of problems and issues! I have a 110GB + harddrive with about 20GB of data on it. After enabling FileVault, it seizes all but about 600mb of storage space. And when I try and disable it, it says there is not enough free space to disable it. AND when I try and save my data to an EXTERNAL drive, it gives me the same error. IT TOTALLY BLOWS and I'm sorry I ever enabled it. I'm about ready to reload the OS. Any suggestions anyone?
I think what happened is that somehow, the process got botched (it seems to happen occasionally when you have a really big user directory -- for instance, you should move your music and videos and pictures folders out, e.g. to /users/shared/, as there's generally no reason to encrpyt them). When the encryption becomes botched, you end up with a huge image file hiding somewhere (I think in /var/tmp, but I could be wrong) that must be deleted.
As a counterpoint, I had it working on my iBook just fine before I got rid of it. I was in the habit of weekly backups though.
As for the pros/cons of using encrypted disk images, it really depends on what your goal is. The reason people in certain industries push for whole disk encryption is that Windows has a bad habit of placing sensitive information in various temporary locations, instead of respecting the user home directory. OS X does not do this. However, it does place sensitive information in the library folder
inside the user directory. So, if your goal is to provide adequate HIPAA related privacy safeguards or something like that, putting document files in a disk image is probably a partial but not fully defensible solution, as it leaves caches and the like open to inspection. Certainly I will chime in and say that full disk encryption is a stupid requirement that just compensates for Windows' shortfallings, and good IT people will recognize that Filevault + secure VM is sufficient. But I wouldn't defend making separate encrypted disk images.
If your needs are more casual, though, it might be fine. If you're asking "what is filevault and do I need it?" the answer is probably "no."