I see that Lion offers the option of encrypting TIme Machine backup volumes, which seems like a Good Thing. After reading up a bit on this, it seems clear that it will handle the situation where the backup volume is physically attached to the machine being backed up. However, I've gotten mixed signals about whether this will work with networked clients. I have a server with a TM volume, and a number of machines on my network use that server and its disk for TM backups. Can I encrypt the TM volume in this situation, and will Time Machine be able to back up from those clients to the server? I can't think of any reason why it shouldn't work, but, like I said, the overall story isn't completely clear. Thanks for any advice!
According to information from this page, the answer is no, it will not support encrypted Time Machine backups to network-attached storage. They're specifically mentioning Time Capsules and Airport Extremes. The issue Paul Eccles mentioned looks to be related to whether you can backup to NAS with Time Machine at all without regard to encryption status.
The link referenced also seems to indicate you can't use Time Machine encryption on direct-attached storage, but that may be because you can use Disk Utility to encrypted a direct-attached volume instead. Commenter Fracai calls out the classic standby of creating an encrypted disk image, storing that on network-attached storage, and mounting that for your Time Machine backups.
I'll also point out the discussion on that page (which is slightly inaccurate, but mostly on) wherein commenter TrumpetPower! cautions encrypting backups. This is a point worth repeating here. I'll rephrase (more precisely and accurately) what TrumpetPower! wrote:
If you encrypt a backup, you add complexity to a process designed to simplify and preserve access to your information. With complexity comes increased probability of failure. Thus, the chance that you lose access to your backed-up data goes up. Do yourself a favor and make sure you understand when and why you might wish to encrypt your backups and think hard about how you'll ensure you have access to your encryption key when it counts.