Ok. Sorry but I may be a bit dense here.

There is no sparse image to select until SD creates it (or so I think.) I used the 'to' to select 'Disk Image...' which then allowed me to get to the 'Save As...' where I did that so that I would theoretically have an empty sparse image file but going through the Finder, I don't yet see any sparse image file to select because SD hasn't really yet created it. Am I missing something here? Or am I supposed to be able to pre-create this sparse image in another way?

Ooops. I thought it was time to reread the documentation and within that I quote:

"It's very important that the network drive support files larger than 4GB. FAT32-based servers or NAS drives will not work, and fail pretty spectaculary when this limit is reached. Please ensure that the network volume is HFS+, NTFS or ext3 all of which support large files."

Given the above, my wishes for using a NAS drive are pretty much shot down I guess. I did mention that I was using a NAS setup in my original post but we all missed it.

No, a NAS works fine: it's a FAT32 NAS (or servers) that won't work.

Is yours formatted FAT32?

I'll trust your saying that a NAS will work even though it is specifically stated that NAS will not work per my quote above.

Moving forward though, yes, my NAS is formatted FAT32. :-( I guess this is done in the interest of the greatest availability to users. Not quite sure what to do at this point though since I want to access it from my Macs and from my PC, kinda the whole point of having a NAS. FAT32 is the only one that is truly cross compatible. Ugh. Am I wrong on this?

I actually wrote the User's Guide, and it's a confusing sentence. What I was saying was that you can't host images on drives that won't support >4GB files, nor will it work with protocols that don't support large files.

So, NAS devices and servers that don't support these things won't work.

You don't need to format a NAS as FAT32 to access it with a PC. That's part of what the network protocol abstracts. After all, you can access your Mac's HFS+ formatted drive from a PC, right?