I've been using tor for several months now. For those that aren't
aware, it's a second generation onion routing solution. This offers
pseudo anonymity as it passes your traffic through a random tor server
so your source IP will not be revealed to the destination. This is an
excellent idea in theory, but I have a few concerns.

1) I'm not sure how much encryption would slow down the already
significant loss from using a proxy, but all traffic is still passed
cleartext. A sniffer at your ISP level and you're still compromised.
 Solution: Encrypt the traffic, including the dns lookups.

2) Anyone can run a server. It seems to me that those that you may be
trying to remain anonymous from, could simply add a server, or many, and
wait for you to use theirs. For your entertainment, I have just taken a
snapshot of the current default tor servers available at
http://www.yashy.com/tor.servers.txt. How much do you trust your traffic
going through these hosts?
 Solution: Manually choose yours.

3)  You will notice there are many large US think tanks listed there, it
seems the two DNS' I most often get are one of the seven mit.edu or
harvard.edu tor servers. It would seem to be most non-US citizens would
prefer as little traffic as possible hits US soil, not just because of
the carnivore-ish sniffing that goes on, but to avoid US Patriot Act
concerns.
 Solution: I'd be interested in starting a server network of non-US
servers.

 I'm not aware of anyway at this time it would be possible to prevent a
malicious server in the network from sniffing your traffic however.

 For more information on tor:
http://tor.eff.org/

 Cheers,

--
Yashy