[dnanian]

Actually, you're not doing anything wrong. This is a known problem in SD! with 10.3.x that we'll be fixing in the next release. In the meantime, the workaround is to create the sparse image, of the appropriate size, using Disk Utility. You'll only have to do this once.

1. Open Disk Utility (found in /Applications/Utilities).
2. Without selecting any volume/drive on the left side, click the New Image toolbar button.
3. Give the image an appropriate name (like Backup), and store it on a drive other than the one you're trying to back up.
4. In the Size pop-up, choose Custom.
5. In the sheet that appears, enter the size of the drive you're trying to back up. Note that the pop-up does not have a selection for GB: you need to enter "40000" MB for 40GB. Click OK when you've got the right size entered.
6. Decide whether or not you want the image encrypted, and choose the proper value in the Encryption pop-up.
7. In the Format pop-up, choose sparse disk image. Or, if you want a "regular" read-write image, choose that. Note that if you choose a regular (non-sparse) image, you need to point us to the volume that's created, not the file.
8. Click Create.

Once it's created, go back to SuperDuper! and choose the "Disk Image..." selection in the destination pop-up (unless you're using a regular image). Navigate to the location where you created the image and click it (it's grey, but that's OK -- click it anyway), then click "Save".

Hope that makes some sense, Josh...