Once the formatting is complete you'll need to enter the password to be able to mount and view the contents of the drive.

You'll be asked to confirm your choice and enter a password for the volume.

For the format pick either Mac OS Extended (Journaled, Encrypted) or Mac OS Extended (Case-sensitive, Journaled, Encrypted) from the list of available options.

Select the drive and click on the Erase tab.

MacWorld has a short slide show that walks you through mounting and formatting the disk with an encrypted file system. The caveat? You can only use FileVault-protected drives on other Lion machines. Just about any read/write storage media you attach via USB or FireWire can be FileVault'd and secured. FileVault makes it easy to encrypt your primary drive but you can also use it to encrypt the contents of remote storage. With Lion you have FileVault to achieve this. So really the question you want to ask is: how do I encrypt an external hard drive? Honestly I'm not even certain that's something you can do since, what would the password be granting access to if the contents of the drive weren't encrypted? Password protecting a drive isn't really possible (or even useful) without also encrypting the contents of the drive.

External hard disk password protection