This is a Snow Leopard update, and a bundling of, the hint on using Time Machine on a networked AFP volume and this comment about creating a bootable Time Machine backup.
Issues addressed:
I use two shell scripts to make the magic happen. The first, mkBackupImage (view source) creates such a disk image, optionally encrypted. The resulting image, when at the top of a disk (remote or local), is recognized by Time Machine for automatic backups, and for partial and (when booted from a Snow Leopard installation DVD) full system restores.
As long as the system keychain has the password for the image, Time Machine will automatically back up to the image, keeping the contents safe. For a full system restore from an encrypted image, the image itself has to be decrypted first, which is the task for the second shell script, decryptSecureBackupImage (view source).
You can also download both scripts in one zip file, if you prefer. After downloading, or saving from source, save the scripts somewhere, and then run them in Terminal.
Testing: These scripts have been tested in the following ways:
Mac OS X Hints
http://hints.macworld.com/article.php?story=2009092822584146