Compressed Backups on 2.1.1
There's something a little odd going on with the backups.
I checked the "compress backup" box and performed a full backup, it was done in a few seconds... too fast.
Then I unchecked the "compress backup" box and it took the correct time to make the backup, but it appeared to be making two of each backups.
When I looked at the files created with a file manager, there were indeed 2 backup folders, but the files in the first one (compressed) were created after the 2nd one. The folder size of the compressed backup is marginally smaller as only the system file was compressed.
So, it appears as if TWRP gave the "success" indication a bit prematurely while doing the first compressed backup.
EDIT1: I checked out the new baseband selector in CM7 then came back to CM9, restoring the uncompressed backup, worked perfectly.
EDIT2: Performed another compressed backup, took much longer this time (233 sec for system) and all 7 files were created properly and the sizes were significantly reduced.
Conclusion: the first dodgy compressed backup was a glitch - not easily repeatable.