Yes I have the same problem too.
Like other posters it worked the first time then insisted that the target is a critical volume.
Initially there was a work around to the problem. See my blog posting about letting system state backups go to this "critical volume"
www.majzel.com: The Long Road to Windows 2008 Server
As of right now I can do a System state backup but not a full OS backup to my Z: drive.
This is useless to me!
My Z: drive is simply a blank 1TB disk for OS backups.
I would encourage you to start DISKPART and check that your volume has no obvious critical components on it. Of course if you formatted it then like me it seems to be a mystery.
Overall my question is. What is a critical volume and how can we tell exactly what is making it critical.
Here is an extract from DISKPART on my supposed Z: critical disk:
Volume 10 Z backup NTFS Partition 932 GB Healthy
DISKPART> select volume 10
Volume 10 is the selected volume.
DISKPART> detail disk
SAMSUNG HD103UJ SCSI Disk Device
Disk ID: 78FF4B1B
Type : SCSI
Bus : 0
Target : 0
LUN ID : 0
Read-only : No
Boot Disk : No
Pagefile Disk : No
Hibernation File Disk : No
Crashdump Disk : No
I am therefore confused as to why this is regarded as a Critical Disk. Multiple google searches have revealed nothing.