Got this working! There was some "partial backup" or something along those lines file name on the TM disk. I deleted that and tried again and it finally worked! Must of been on there from a prior system I used to use this USB drive on. This isn't so much a Lion only issue as it was the case before I upgraded to Lion and I was hoping it'd go away with the upgrade. Maybe I'm just not understanding how it works correctly but when I turn Time Machine on it ask me to select a disk which I have to assume is a disk to back up to not the source I want backed up as I do not see my boot/OS disk as an option. I select an external USB disk I have attached and when I go into options and exclude, I can exclude any other external USB disk but I cannot exclude the destination external USB disk I set to back up to in the first step. It of course fails to backup as it says it doesn't have enough space to backup the combined capacity of my boot/OS disk and the destination 1TB USB disk. I don't want to backup the external USB disk, I only want to backup my boot/OS disk to my external. What gives?