I've always wanted to have a fully encrypted memory stick which when plugged in, OS X would automatically ask me for a password before mounting it. As far as I know (and from what tests I carried out), it's not possible to create an encrypted disk image and overwrite the entire device with it.
My solution involves placing a hidden encrypted disk image on a device, hiding the volume itself so it doesn't show up in the desktop, and applying a Folder Action to the /Volumes folder which takes care of mounting the encrypted image when the device is plugged in, and unmounting the device when the encrypted image is ejected.
No Terminal access necessary: an AppleScript droplet for preparing the device, the Folder Action AppleScript, and an AppleScript for restoring the device are provided here.
The scripts are tested in 10.5.1, but they really should work in Tiger as well. Only known issue: if you hit Cancel when asked for the password to mount the encrypted image, you will have to unmount the device through Disk Utility, as it's not accessible via the Finder. However, it's not hard to create a 'cleanup' AppleScript that does this.
[robg adds: Typically, I'd host these scripts on macosxhints as well. In this case, however, due to their complexity and the chance of their changing in the future, I'm leaving them linked via the external site. I haven't tested these scripts. One other solution to do this came up just yesterday -- TrueCrypt is a free program that's now available for OS X. Using TrueCrypt, you can apparently encrypt an entire USB memory stick, for instance. I haven't tested it, however (I believe it uses MacFUSE to do some of its magic).]
Mac OS X Hints
http://hints.macworld.com/article.php?story=20080131035416191