I use FileVault on all of my systems, which include two MacBook Pro systems (one with dual hard drives), a Mac Mini, and an XServe, and have enabled it on numerous other Macs that colleagues have used, and also enable encryption on most of my external hard drives.
You can clone your encrypted drive, though you might have troubles doing block-level clones. Once the drive is unlocked and mounted the system treats it as any other drive, and you can use Carbon Copy Cloner or another cloning tool to file-level clone your drive. The problem with cloning Lion drives with file-level cloning is you will not copy the hidden Recovery HD partiton, but this hurdle is present regardless of whether or not you have FileVault 2 enabled. However, it only takes a few more steps to restore the Recovery HD partition when cloning or restoring your system from backup (it just takes remembering to do so, since cloning is not officially supported by Apple as a backup/recovery routine).
Installing new applications and managing documents is seamless, and is the same as if you install them on any other OS X system. The encryption happens underneath the OS, so OS X, documents, and applications you use are unaware of it and work as they would on any system.
Your concerns about losing the password are good ones, but if you already set your system to use the login window instead of automatic login then there is no difference (the regular use of the login window ensures you remember your password). The same password is used to unlock the drive and then log into your account once the system is booted. The difference with login is that you will need to specify the users who are able to unlock the drive (done in the FileVault system preferences). If a user is not, then the initial login window will not show that user account, and to get to that account another user will have to log in, and then log out so the unauthorized user can access his account.
In terms of performance problems, I've not seen any in my uses (primarily office and computational analysis with programs such as Igor Pro, Matlab); however, I use SSDs in my systems so this greatly increases overall performance and results will likely be different if you are using the slower classic HDD technology.