It seems like a good idea to backup SQL Server 2005 databases to a compressed folder, however if your database is larger than roughly 30 GB, you will get the following error:

BackupMedium::ReportIoError: WRITE failure ON backup
device 'G:\Backups\200501220402.BAK'. Operating system
error 33(The process cannot access the file because
another process has locked a portion of the file.).

One way to get around this is to stripe the backup to multiple files, for instance:

BACKUP DATABASE AdventureWorks TO
DISK='G:\Backups\200501220402.BAK1',
DISK='G:\Backups\200501220402.BAK2',
DISK='G:\Backups\200501220402.BAK3'
WITH FORMAT, CHECKSUM;

Not ideal, but there are two options:

  1. Buy LiteSpeed Backup which includes compressed backups
  2. Wait for SQL Server 2008, which includes compressed backups