You can put all of your music and movies on either a hard drive connected to your Mac, Time Capsule, or a drive attached to the Time Capsule and it will play fine. I currently have mine on a Time capsule and two different Macs access this library and even used a NAS for this for a while. Follow these directions
iTunes for Mac: Moving your iTunes Media folder
The one thing that you have to remember is make sure the drive/Time Capsule is mounted when you launch iTunes otherwise it looks on your internal drive for the files. If you ever forget to do that simply quit iTunes mount the appropriate drive and relaunch iTunes.
I have not tried it personally but have seem reports that Time Machine can back up external hard drives as long as they are formatted HFS+ and not in the list of excluded items in Time Machine.
As far as other devices what else are you trying to back up?
My TC is behaving fine as a media server though an Extreme with external drives attached should also work.
My other devices include my iPhone, my iPad2, and my other External HD's.
Basically here is the setup I currently have (I went to the store since starting this thread and picked up a Airport Express)
Ext HD 1 - This is where I got Time Machine. Currently backing up just my MacBook Air though I'd like it to back up my other devices.
Ext HD 2 - This I basically use as a Sever to hold all my movies and music. Soon I'd like to move my iPhoto library of pics and albums over as well.
Super Drive 1 - Configured for PAL
Super Drive 2 - Configured for NTSC
All (4) devices are plugged into a 7 port USB hub that is plugged into my...
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MacBook Air
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iPhone
iPad2 - Both my iPhone and iPad are actually my girlfriends, so at the moment Im trying to figure out how to have a separate iTunes library on my Macbook since I cannot simply pull the MP3's from the Ext HD Server's and drop them into the iPhone/iPad via a USB adapter. I have no issues with her using my notebook to sync her stuff up to her photo/music libraries stored on the Ext HD's.
Android - My phone is actually an Andriod Nexus One. Im currently trying to use the app called "AirDroid" which is supposed to allow my phone and computer/ext hd's to speak to each other and transfer files thru the network.
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Huawei E355 - Internet USB Key / WiFi Hot-Spot - This is the unit providing the internet and subsequent network that everything is connected too.
Airport Express - I had it playing my iTunes just fine from my MacBook Air and then I tried to connect my chic's iPhone and ever since it has been blinking amber. I cant get it to work again.
Speaker - I have a small USB powered portable speaker system that I have plugged into the Airport Express in both its audio jack port and the USB. The Airport Express is powering the speaker.
Now, when I try to open up Airport Utility to see what the issue is with the Express, I cannot even get it to show up. Ive tried soft (unplugging it for 20 seconds) and hard resets (the paperclip button) and nothing works.
As you can see, I do not have a traditional modem or router setup.
I would like to make it so my chic can play her music off of her iPad or iPhone thru the Airport Express, for when Im gone and my MacBook Air is with me. But currently the Express is giving me a headache.
And in an ideal world I'd get a Airport Extreme so that I could wirelessly access my movies (or music) and watch/listen to them from my notebook without the notebook having to be physically plugged into the USB hub.
>EDIT: I JUST REALIZED WHAT I DID WRONG the first time I configured the Express, I set up its own network instead of joining the one already in progress by my USB key. Im now doing it the right way I hope. Though, I still cant get the Express to show up on my iPhone.