I suppose you have eliminated any third party Anti-virus software from being part of the problem?
Do you know for sure it is the C: drive that is causing you problems? I was thinking you might try using the wbadmin command as JVDEV# illustrates. When that utility works, you can watch the progress of each partition as it is being backed up.
I'm not using any 3rd party anti virus! :)
All I know is what the error dialogs always say - some cryptic Microsoft Error Code, vague mumblings about an "I/O error" and urging me to run CHKDSK /R.
I will try running when wbadmin command from the power shell, and see if that achieves anything...
I still suspect it is something to do with encrypted files on my C: drive, although if that's the case, I don't see why we can't get a straight answer out of Microsoft as to whether the VCSS can cope with encryption (or why the error message can't report that as the problem).