FileVault and Time Machine...Oh My!
OK, I've been experimenting and here is what I have found.
You can use FileVault (FV) with Time Machine (TM) with the following pluses and minuses.
First, if you have a Tiger FV you need to decrypt and recrypt under Leopard.
Second, TM will run, even when you are logged into your FV account, but will only backup everything on your disk OUTSIDE your FVed home folder. Thus, it makes sense to move as much out of your encrypted home folder as possible in order to maximize the ease of backup and the ability to scroll back in time through more files.
Third, after TM has run at least once while in your FV (or tried to run), when you log out of your FV account it will a) offer to compress your sparseimage and b) offer to backup (I assume this only occurs if connected to your TM drive at the time you logout).
Fourth, the first time you do this backup it takes forever (depending on the size of the stuff in your home folder).
Fifth, when done, you end up with a sparseimage on your TM disk that you can mount (by double clicking and entering your password) and then peruse for files, etc.
Sixth, when the next time comes for a TM backup and you are logged in to your FV account, once again, it backs up everything except your FVed home folder.
Seventh, when you then log out of your FV account and have the TM disk attached, you again will be offered the chance to backup.
NOW THE GOOD NEWS.
First, the backup is much faster because, as I hoped, the new FV format allows TM to just backup the changed files!!!!! in your sparseimage!!!! Very fast, much less space!!!!
Second, you end up with TWO sparseimages in separate folders on your TM disk and each copy reflects your home folder at the time it was backed up!!! It is not the pretty starry TM effect, but it does allow you to recover files that were accidentally deleted, just like TM.
Third, your backup is secure!! because your FV folder is still in an encrypted sparseimage. No need to backup to an encrypted disk/image (assuming your non FV data is not sensitive)!
Fourth, when you go back in time via TM, you will see the various sparseimages that reflect your home folder AT THAT TIME. Unfortunately, within TM I can not see how to remount them but, at least, you can restore them to a drive and then mount them from the finder and find your files. (I tried mounting a sparseimage and then going into TM to see if I could browse it that way but it didn't work)
Fifth, it certainly seems that the basic functionality is present to do the fancy time machine info for individual files they just need to work out how to mount the sparse images from within TM. So there may be hope.