All Partitions But OS Backup Successfully?

Upgraded from 3.2 to 3.5 SBS Edition. 

The data and swap partitions backup full with no problems. The data partition is over 200GB in size. 

The following is the output from SP's log:

03-Nov-2009 08:00:00	service	100	service (build 43) started job by incremental trigger
03-Nov-2009 08:00:00	service	104	3.5.0.3570 DCB9-51B0 19EB-2290-1493-21D1
03-Nov-2009 08:00:00	service	100	backup volume C:\ (NTFS)
03-Nov-2009 08:00:00	service	100	VDIFF was disabled and then enabled on C:\
03-Nov-2009 08:00:00	service	102	creating snapshots for  \\?\Volume{05c922c4-0ea9-11dd-9e75-9ee6de3ced38} \\?\Volume{5849ea9a-0e73-11dd-952a-806e6f6e6963} \\?\Volume{05c922c0-0ea9-11dd-9e75-9ee6de3ced38}
03-Nov-2009 08:00:00	service	199	try snapshot by  VSS API by STC provider
03-Nov-2009 08:00:29	service	150	retrieving snapshot names.
03-Nov-2009 08:00:29	service	103	snapshot was created by  VSS API by STC provider. It took 29 seconds
03-Nov-2009 08:00:29	service	104	image will be created by VDIFF
03-Nov-2009 08:00:33	sptask	111	sbrun -mdn ( sbvol -fi \\?\STC_SnapShot_Volume_21_0 \\?\Volume{5849ea9a-0e73-11dd-952a-806e6f6e6963} : sbcrypt -52 : sbfile -wd E:\SBS01_C_VOL-b001.spf )
03-Nov-2009 08:00:33	sptask	110	Worker thread has started
03-Nov-2009 08:00:33	(loader)	112	corelogic version: 3.5.225.3570
03-Nov-2009 08:00:33	sbvol	109	free space exclusion on
03-Nov-2009 08:00:33	sbvol	107	incremental tracking is on, generation count: 0
03-Nov-2009 08:00:33	sbvol	117	incremental tracking is on, 112647712 of 112647712 (100%) updated sectors
03-Nov-2009 08:00:34	sbvol	101	successfully opened volume \\?\Volume{5849ea9a-0e73-11dd-952a-806e6f6e6963}
03-Nov-2009 08:00:34	sbvol	107	FAT system area sectors: 0
03-Nov-2009 08:00:34	sbvol	112	file \\?\STC_SnapShot_Volume_21_0\pagefile.sys excluded OK
03-Nov-2009 08:00:34	sbcrypt	109	filter started
03-Nov-2009 08:00:34	sbfile	101	successfully opened file E:\SBS01_C_VOL-b001.spf
03-Nov-2009 08:00:35	sbvol	107	disk MBR sectors: 1
03-Nov-2009 08:00:35	sbvol	107	first track sectors: 63
03-Nov-2009 08:00:35	sbvol	109	disk CHS 91060/255/63 partition 1
03-Nov-2009 08:00:35	sbcrypt	107	compression mode: 5
03-Nov-2009 08:00:35	sbcrypt	107	encryption mode: 2
03-Nov-2009 08:00:35	sbcrypt	600	Please enter the encryption password
03-Nov-2009 08:00:35	sptask	101	Answer was sent as UNICODE string
03-Nov-2009 08:04:05	sbfile	109	probing the target media for > 4GB files support
03-Nov-2009 08:06:20	sbvol	503	Fatal I/O error on \\?\STC_SnapShot_Volume_21_0 offset 4de261000 on read (-31 A device attached to the system is not functioning.)
03-Nov-2009 08:06:20	sbvol	109	fini done
03-Nov-2009 08:06:20	sbcrypt	500	Unexpected end of the image file
03-Nov-2009 08:06:20	sbcrypt	109	fini done
03-Nov-2009 08:06:20	sbfile	109	deleting the incomplete output file(s)
03-Nov-2009 08:06:20	sbfile	109	fini done
03-Nov-2009 08:06:20	(loader)	504	Final error (-31 A device attached to the system is not functioning.)
03-Nov-2009 08:06:20	sptask	516	sbrun.exe started successfully but failed to complete the task
03-Nov-2009 08:06:20	service	104	retry task
03-Nov-2009 08:06:21	service	105	snapshots were destroyed

The USB HDD is 1TB in size and is brand new.

What gives?

Philip Elder