Main features of TrueCrypt Disk encryption software are:
1) Encrypts a partition or drive where Windows is installed (pre-boot authentication)
2) Creates a virtual encrypted disk within a file and mounts it as a real disk
3) Encrypts an entire partition or storage device such as USB flash drive or hard drive
For Pre-boot authentication, conventional YubiKey (emitting OTP) can not be used because, in pre-boot environment, the network service will not be available and hence it wouldn’t be possible to send the OTP for validation to the Yubico Validation Server over network. However, a YubiKey programmed (using Yubico personalization tool) to emit a fixed (randomized at the time of creation) password can be used with TrueCrypt pre-boot authentication.
For the second TrueCrypt feature, a conventional YubiKey can be potentially used, provided that the virtual encrypted volume is mounted upon user request after completion of the boot process and network connectivity is available. In this case, a DLL could be provided to authenticate the YubiKey OTP with Yubico Validation Server over network.
Similarly, for the third TrueCrypt feature, a conventional YubiKey can be potentially used provided that the hard disk or USB flash drive is mounted upon user request after completion of boot process and not automatically during the boot process.
Yubico is welcoming development of YubiKey enabled post-boot authentication for TrueCrypt. If you or someone reading this post is contemplating development of such a module, please let Yubico know about it in order to provide some technical help!