Here's the update........
I tried the manual sparsebundle creation. It does the same thing that the instructions from the manual do: "Backup disk image could not be created."
So i got on the phone and spoke with customer support. After about half an hour of going back and forth to get questions answered, I finally got a definitive answer:
YOU CAN'T HAVE TWO INSTANCES OF TIME MACHINE ON THE SAME DRIVE. So I'm SOL unless I want to buy another backup drive. I wish I had known this before I bought the unit as it seems to be impossible to return a hard drive. I was trying to avoid the Apple Time Capsle but after wasting way too much time screwing around with the Buffalo box, the Apple solution seems like a bargain.
2/4/11 Another update......
After speaking with customer support, I thought of a couple more things to try before giving up on the Linkstation. I deleted the first Mac that was working and tried the second Mac again to test the two Mac theory. Sure enough, the second Mac had the same problem, "Can't created disk image."
After some more tries, I got It.......
After you enter the computer ID and MAC adress into the Buffalo software, you get a small window that says, "creating disk image." You click on it and it goes away. It seems like you're all set to go to Time Machine and start the backup - but you're not. Open the shared folder on the linkstation where you expect the sparsebundle folder to be. The folder will be empty but after SEVERAL minutes, the sparsbundle appears. Now you're ready to launch Time Machine. It takes longer than you think to create the new folder and there is no indication when it is complete. This seems like a good place for a software installation progress bar that most other software installs seem to use.
I wasn't waiting long enough for the folder creation to take place before launching TIme Machine. Once I got the second computer running the backup, I went back to the first comp to recreate the folder that I had thrown out. This time it took close to 10 minutes for the sparsebundle folder to appear - probably because the Linkstation was busy with the other backup. So now I'm at the point where BOTH Macs have successfully created Time Machine backups on the Linkstation. This means that the info I received from customer support is wrong. I haven't tried to do a restore of the backup yet so I can't say it is 100% functional.
Acronis still can't deal with my Mac Mini running XP but I was able to launch the Miscrosoft backup and it found the Linkstation just fine so I think I now have 3 computers all running independant backups. Hopefully this is the end of the story.