Due to a bug in OS X 10.3.9's image conversion, backups "directly" to DMGs is failing at the end of the process with the message:
hdiutil: convert failed - image/device is too large
We've reported this new problem in "hdiutil" (part of OS X) to Apple, and hope they'll be fixing it shortly -- it's new to 10.3.9.
In the meantime, we'd suggest using a "Sparse Image" as explained in
this FAQ.
Our apologies for the difficulty: alas, in this situation, we're at the mercy of Apple's own tools.