Hi Folks,
I've seen a few comments on here about Time Machine not working on Lion OS. I just bought a DNS-325, loaded it up with drives, and went to back-up my wife's new MacBook Air. I ran into the same issues reported here.
However a little bit of sifting through the web and I found my answer. Check out this great article by Greg Hesp on setting up a Time Machine back-up on Ubuntu. The Ubuntu stuff doesn't apply us DNS-325 users, but starting on point #5, this should patch up Lion enough to start your back-ups.
btw... he refers to another site for a shell script to create the sparse bundle. You'll have to create an account there to login and download the files.
http://greghesp.com/2011/09/how-to-setup-an-osx-lion-time-machine-share-on-ubuntu/I've set my sparse bundle to 500G so her MacBook doesn't eat up the entire drive. Set yours for what makes sense. It's backing-up nicely now.
Best of luck!