Hi Darren,
If you use FileVault (FV), then whatever's in your home folder that's backed up by Time Machine (TM) will also be FV'ed. This method; however, as I understand is not the most efficient for TM as in the background FV creates an encrypted Disk Image (DI) of your entire home folder, so anytime you make changes anywhere in your home folder, your FV-DI changed. Then at backup time, TM needs to make a newer copy of your entire home folder FV-DI. I think my backup drive would be full after about 20 backups considering there are the Music, Movies and Photos folders.
Instead of FV, another possibility would be to only put sensitive data into individually encrypted DIs. The more DIs you use the more efficient backups would be, but also usability would drop...
I may just try putting my Time Machine disk into a password protected, encrypted DI on the backup HDD.
One thing you may also want to try is encrypting your external backup drive with a password. Depending on the drive you have it may have come with software on the CD that does this. Be careful though, I had a terrible experience with really crappy encryption software that came with a Freecom HDD. It was not easy to setup and in the end it caused me to lose my backups. If you have this option, I would do some googling or maybe the manufacturer's website has a forum to find out first how reliable their software is.
