Several DropDMG users have reported errors such as this:

Error hdiutil: create failed - image/device is too large

In most cases this means that there isn’t enough free space on the destination 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 8 GB (logical size). I do not know of a workaround except to use Mac OS X 10.3.8 or 10.4.x.