I have a number of USB-powered external hard drives I was going to use for server backups for my Windows 2008 server.
I tested Windows Server Backup, and it seemed to back up fine. However, since I'm concerned about security and the possibility of someone else potentially having access to the drive, I wanted to encrypt it. TrueCrypt seemed a logical choice over BitLocker, since I could always have a copy of TrueCrypt available for recovering data, unlike BitLocker, which would only be available on the Windows 2008 server (I do not have Windows 7 Enterprise available).
I went ahead and encrypted the drive with TrueCrypt, and attempted to back up to the new encrypted volume, but Windows Server Backup threw an error on the last step: "An error occurred while creating diff area file on the backup destination volume. Catastrophic failure."
I ended up creating a partition on the server and setting it as the backup location for Windows Backup Server (since it seems to require its own drive letter). Then, I use a batch script to run the back and then robocopy to copy the backup to the encrypted external USB drive.
There are several parts to the batch script, but the essential pieces are these: