Working on source drive during backup
 

Is that a bad idea? I realize that changes I make on the source drive are not likely to get copied over to the clone if I'm working during a smart update. but other than that is it ok to do, or will it kill the backup process?

The best thing to do is to quit all apps and not use the Mac. You can lightly work if you'd like, but yes - you can cause problems, especially if working on large files or with apps that have large data files (eg VMWare, Entourage, Parallels, download programs, iTunes, etc).