Cannot create a backup image!

Question

I did a clean install of Snow Leopard after upgrading to a 500 WDC Western Digital hard drive. After installing additional software, I decided to create a base image of my MacBook. I bought a USB Western Digital PassPort 500 MB hard drive, and disabled the virtual CD by upgrading the firmware so I could use the USB drive without no prompts appearing after connecting it to my MacBook. Everything seem fine so far. I booted to the Snow Leopard CD, run the disk utility and it found the USB drive, I reformatted the USB drive to ensure that it was detected, and the Disk Utility had no issues detecting it and then formatting it.
I selected "New Image" and then selected the "Macintosh HD" drive and for "Save to" I selected the Western Digital USB drive. After a brief pause, I received the error" Cannot allocate memory". Anyone else receiving this error? My MacBook is about three years old and has 2 Gig of memory.
Also I had no issues in using this USB drive to create a backup using the Time Machine utility after logging in as an administrator. Note that I have my home folder encrypted, so I had to create a administrator account and log on using that account in order to create a backup of my home folders.
The reason that I want to create an base image using Disk Utility is that I read that Time Machine doesn't backup ALL operating system files like a image created using Disk Utility.
Rich

Answer 1

I understand what TIme Machine does, and I did create a backup using it but I really rather have an image create from Disk Utility, but I get an "cannot allocate Memory" error after I perform the steps below...
Instructions for backing up to an external hard disk via Disk Utility
Connect an external hard drive (FireWire or USB) that has sufficient free space to hold at least one copy of the contents of your Macintosh HD.
Start from your Mac OS X 10.5 Install DVD. (Insert the disc, restart and hold the C key.)
Select your language. Do not start an installation.
Choose Disk Utility from the Utilities menu.
Select the disk you wish to back up (your source disk, such as Macintosh HD) in the source pane on the left.
Click the "New Image" button in the toolbar.
Give your image a useful name such as "04-15-2009 Macintosh HD backup". A date in the name makes it easy to tell when the backup was made.
Note: For additional security, you can encrypt the backup disk image. From the "Encryption:" pop-up menu, select either 128-bit or 256-bit AES encryption.
When prompted enter a password for the encryption: Use the password assistant to help you make a good password, or see this link for information about how to choose a good password. Select "Remember password in my keychain" if you want to securely store the password in the keychain of your external hard drive's admin user account.
Be sure the Save destination is a location on your external hard disk, then click "Save" to continue.
Enter your admin name and password if prompted.
The imaging process will begin. The time it takes to complete the imaging process depends on factors such as the amount of data on your Macintosh HD. Approximately 1 GB per minute will be imaged, depending on various factors.
When the process is complete, quit Disk Utility (press Command-Q).
Press Command-Q to quit the Mac OS X installer; you will be prompted to restart.