Time Machine / FileVault / External Backup solutions needed.

Question

Hi,
I have a MBP that was playing up a little while ago, after visiting the Apple store I was told to back up my data and do a clean install of Snow Leopard, once that's done, to only pull back the files/folders needed, this has all be done and my MBP is working lovely now.
I am now backing up my information to an External HDD on a regular basis via Time Machine (TM) and that's great, BUT I can't password protect the EX-HDD!
Question: Is there a way to password protect my EX-HDD? I shall be partitioning the drive soon and sharing it with another user and I don't want them to be able to access my files and folders.
What options do I have, I've been YouTube'ing all day and checking the forums but I just can't seem to find a definitive answer.
My goals are: -
1) To allow another user to back up their MB to my EX-HDD on their partition of the drive.
2) Password protect my partition on the EX-HDD so access to read/write is only granted once password is accepted.
3) Continue to use TM on both partitions when backing up
Question - Is FileVault a viable option? I've read that once files are encrypted the lag literally spoils the experience of OSX.
Question - Do FileVault and Time Machine work seamlessly together?
Any help is greatly appreciated, I've been trying to find a solution to this all day.

Answer 1

Hey thanks for your input, I was reading about another solution which I have started, where I can use Disk Utility to encrypt folder/files and only mount them when needed. There were two options to do this.
(1) is to create a sparse disk image - and I believe that I would then set a size limit for the disk image encrypt it, provide a password and let TM back up the .dmg file and away I go.
or
(2) is to create a sparse bundle disk image, same as option one, only it will just encrypt portions of files/folders that have been changed and not the whole image like option 1.
I've gone with option two and given it a dummy run and it's all good, however when setting the allocated sizes for the volumes and the image is created, is there anyway to increase and decrease the allocated amount at any given time? And if so, how...?
And to clarify Sparse disk bundle image + Time Machine = play nicely?
I've tried to be as clear as possible and I hope that the above makes some sense.