The following post was added to the DropDMG blog:
Several DropDMG users have reported errors such as this:
Error hdiutil: create failed - image/device is too largeIn most cases this means that there isn’t enough free space on thedestination drive to store the image. However, there also seems to be a bug in Mac OS X 10.3.9 that prevents the creation of images larger than 8GB (logical size). I do not know of a workaround except to use Mac OS X10.3.8 or 10.4.x.