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I'm thinking of purchasing a portable disk drive that supports hardware encryption (most of them seem to do these days). However, if I'm using such a drive can should I still encrypt my TimeMachine backups? I'm assuming that TimeMachine uses software to encrypt the backup data which would be slower than the hardware encryption supported by the drives. Is my assumption wrong?

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It is neither wrong, nor correct :) The drive uses a chip inside to do the encryption and everything depends on how powerful the chip is. Most likely Mac CPU will be more powerful.

Also if you connect over network or through USB2, encryption speed will not matter much because the transfer will be much slower than the encryption.

I would not bother with hardware-encrypted drives and just use Mac encryption. Why pay more for hardware encryption if you can do it with nearly the same speed on a Mac and you have other speed limiting factors?

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