there's nothing preventing anyone from physically reading the data if they were to remove the hard drive from the server and connect it to their own machine, correct?
True.
Do any of the backup app options offer encryption of the backup files while still doing incremental backups?
The only one I can think of would be the
crashplan App possibly. There is nothing out-of-the-box for Amahi that would accomplish it. The OS might have something, but not sure. You might need to use a third-party tool, possibly from a Windows client machine to copy files and encrypt them on your USB drive.
Can they simply be installed into a Windows client desktop and accessed with a 3rd party software that can read ext4 volumes under Windows?
Yes there are tools that allow you to read ext4 in Windows. However if the drive crashes, likely there will be corrupt files and or the drive might be unreadable. This is normal behavior no matter what the OS.