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There are a few changes when creating an encrypted Time Machine backup under Snow Leopard:

1. The name of the sparse bundle no longer contains a (which was in fact the Ethernet adapter address). It is now simply named .sparsebundle.
2. The unique machine identifier is now hidden in the sparsebundle. After you create the encrypted image, open the contents of both sparsebundles (in the Finder, right-click on the sparsebundles, “Show Package Contents”) and move the file “com.apple.TimeMachine.MachineID.plist” from the old sparsebundle to the new one.
3. That’s it. Start the Time Machine Backup and it should work.

P.S. If you created your encrypted Time Machine backup under Leopard, it will still work unchanged when you upgrade to Snow Leopard. These changes apply only if you create a new Time Machine backup under Snow Leopard. Hope this helps!

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From: http://forums.macrumors.com/showthread.php?t=434960#8

For me I was actually creating a new bundle from scratch on a remote NAS – following the instructions here: http://www.readynas.com/?p=253

With the extra steps above seems to work ok with encryption too…..

Any ideas?

After getting errors, and venting this to you, you led me to the light . . . before make install for the libjpeg :

sudo mkdir /usr/local/lib
sudo mkdir -p /usr/local/man/man1/

To make sure the install worked, in Terminal:
python
import Image

If no errors! Success!

Thanks again dude, you are the best!

For info, to limit the maximum size of the backup (100G in this example), the convert command is the following:

hdiutil convert -format UDSB -o name_mac.sparsebundle -encryption AES-256 -tgtimagekey size=100g name_mac-old.sparsebundle

command to decrypt should read

hdiutil convert -format UDSB -o name_macaddress_new.sparsebundle name_macaddress.sparsebundle

in the middle?
YES
just tested
hdiutil convert -format UDSB -o __new.sparsebundle __.sparsebundle