Encrypted Disk Image to Password Protect Folder Not Working!

I have followed the instructions exactly for creating a Disk Image in order to password protect a folder.  Folder contains multiple types of files including images, pdfs, etc.  Here is what I've done and what happens:
In Disk Utility I created a New Disk Image from Folder.  I chose the folder, which I have on my Desktop, and clicked Image.  I gave the Disk Image a new name, placed in on my Desktop, indicated the image format as read/write and chose the 128-bit encryption.  I chose a very strong password and unchecked the remember password box.  At this point, all seems to have gone well.
Now, back to my Desktop.  I have two things going on.
1. The initial folder that I wanted password protected is still present.  Am I supposed to just send this to the Trash?
2. When I double click on the the new .dmg file that I've created, I am asked for my password, which I put in.  Then, nothing.  I mean, nothing happens.  It doesn't open, it doesn't do anything.  I can click on it and choose Open with DickImageMounter, and nothing happens.  I can open with Disk Utility, but this just gives me the normal options to eject, burn, restore, etc.
I don't know why I can't get this to work properly, and I'm a little annoyed that Apple can't make it as simple as selecting a folder and having the option to password protect it, just like you can a normal file.  PLEASE HELP!
Thanks.

As of OS X 10.7.4, Disk Utility had a bug that prevented it from creating an encrypted disk image with a password of more than 10 characters. I haven't checked recently to see whether that bug has been fixed, but from your report it seems not to have been. There is a workaround, but it's complicated.

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    image-options:
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    file://localhost/Volumes/kevin/busted.dmg - (null) ((null), (null)). perm=0
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    DIBackingStoreInstantiatorProbe: entry
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    skip-permissions-check: true
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    DIBackingStoreInstantiatorProbe: probing interface 1 CBundleBackingStore
    CBundleBackingStore::newProbe score -1000 for file://localhost/Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: probing interface 2 CRAMBackingStore
    CRAMBackingStore::probe: scheme "file": not ram: or ramdisk: scheme.
    CRAMBackingStore::probe: score -1000 for file://localhost/Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: probing interface 3 CCarbonBackingStore
    CCarbonBackingStore::newProbe: setting initial rval to +100
    CCarbonBackingStore::newProbe: has resource fork, +100
    CCarbonBackingStore::newProbe score 200 for file://localhost/Volumes/kevin/busted.dmg
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    DIBackingStoreInstantiatorProbe: probing interface 5 CCURLBackingStore
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    DIBackingStoreInstantiatorProbe: probing interface 6 CVectoredBackingStore
    CVectoredBackingStore::newProbe not "vectored" scheme.
    CVectoredBackingStore::newProbe score -1000 for file://localhost/Volumes/kevin/busted.dmg
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    DIBackingStoreNewWithCFURL: returning 0x00000000
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    *** testing:
    0: d234881039:i9111
    (null)
    (null)
    *** testing:
    0: d234881039:i9111
    (null)
    (null)
    *** testing:
    0: d234881039:i9111
    (null)
    (null)
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    DIIsInitialized: returning YESDIIsInitialized: returning YESDIBackingStoreNewWithCFURL: entry with
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    enable-keychain: true
    image-path: /Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: entry
    file://localhost/Volumes/kevin/busted.dmg
    enable-keychain: true
    image-path: /Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: probing interface 0 CBSDBackingStore
    CBSDBackingStore::newProbe score 100 for file://localhost/Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: probing interface 1 CBundleBackingStore
    CBundleBackingStore::newProbe score -1000 for file://localhost/Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: probing interface 2 CRAMBackingStore
    CRAMBackingStore::probe: scheme "file": not ram: or ramdisk: scheme.
    CRAMBackingStore::probe: score -1000 for file://localhost/Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: probing interface 3 CCarbonBackingStore
    CCarbonBackingStore::newProbe: setting initial rval to +100
    CCarbonBackingStore::newProbe: has resource fork, +100
    CCarbonBackingStore::newProbe score 200 for file://localhost/Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: probing interface 4 CDevBackingStore
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    DIBackingStoreInstantiatorProbe: probing interface 5 CCURLBackingStore
    CCURLBackingStore::probe: scheme is
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    CCURLBackingStore::probe: not recognized URL scheme.
    CCURLBackingStore::probe: score -1000 for file://localhost/Volumes/kevin/busted.dmg
    DIBackingStoreInstantiatorProbe: probing interface 6 CVectoredBackingStore
    CVectoredBackingStore::newProbe not "vectored" scheme.
    CVectoredBackingStore::newProbe score -1000 for file://localhost/Volumes/kevin/busted.dmg
    DIBackingStoreNewWithCFURL: CCarbonBackingStore
    opening /Volumes/kevin/busted.dmg setPermission 1723
    CBSDBackingStore::OpenLockFriendly: mapping flags 0x00000002 -> 0x00000026 (locks are MANDATORY)
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    closing /Volumes/kevin/busted.dmg setPermission 1731
    DIBackingStoreNewWithCFURL: instantiator returned 0
    DIBackingStoreNewWithCFURL: returning 0x00000000
    DIResolveURLToBackingStore: processing level 1 encodings.
    DIFileEncodingNewWithBackingStore: entry for encoding level 1
    DIFileEncodingInstantiatorProbe: entry for level 1
    enable-keychain: true
    image-path: /Volumes/kevin/busted.dmg
    DIFileEncodingInstantiatorProbe: probing level 1 interface 0 CMacBinaryEncoding
    CBSDBackingStore::openDataFork: about to open /Volumes/kevin/busted.dmg
    opening /Volumes/kevin/busted.dmg openDataFork 1904
    CBSDBackingStore::OpenLockFriendly: mapping flags 0x00000002 -> 0x00000026 (locks are MANDATORY)
    (RW lock acquired)
    closing 3 /Volumes/kevin/busted.dmg closeDataFork 1984
    00000000: 656e 6372 6364 7361 0000 0002 0000 0010 | encrcdsa........ |
    00000010: 0000 0005 8000 0001 0000 0100 0000 005b | ...............[ |
    00000020: 0000 00a0 548a 2877 86c1 4f17 877b cf66 | ....T.(w..O..{.f |
    00000030: beea 6066 0000 1000 0000 0002 780e 1734 | ..`f........x..4 |
    00000040: 0000 0000 0001 e000 0000 0001 0000 0001 | ................ |
    00000050: 0000 0000 0000 0060 0000 0000 0000 0268 | .......`.......h |
    00000060: 0000 0067 0000 0000 0000 03e8 0000 0014 | ...g............ |
    00000070: d369 cd83 75e8 bb7c 72e5 020d fdd3 68a9 | .i..u..|r.....h. |
    diskimages-helper: fileNameLength $0000006E
    diskimages-helper: resourceForkLength $60000000
    diskimages-helper: dataForkLength $00000000
    diskimages-helper: commentLength $00006700
    diskimages-helper: MacBinary III signature (0x00000000)
    diskimages-helper: header CRC $0000FDD3
    diskimages-helper: minimum decoder version $0000000D
    diskimages-helper: encoder version $00000002
    no MacBinary III signature - checking for MacBinary I or IIDIFileEncodingInstantiatorProbe: probing level 1 interface 1 CAppleSingleEncoding
    CBSDBackingStore::openDataFork: about to open /Volumes/kevin/busted.dmg
    opening /Volumes/kevin/busted.dmg openDataFork 1904
    CBSDBackingStore::OpenLockFriendly: mapping flags 0x00000002 -> 0x00000026 (locks are MANDATORY)
    (RW lock acquired)
    00000000: 7263 6e65 6173 6463 0000 0002 0000 0010 | rcneasdc........ |
    00000010: 0000 0005 8000 0001 0000 0100 0000 005b | ...............[ |
    00000020: 0000 00a0 548a .... .... .... .... .... | ....T........... |
    closing 3 /Volumes/kevin/busted.dmg closeDataFork 1984
    CAppleSingleEncoding::isAppleSingleFile loadAppleSingleHeader failed with error 22
    DIFileEncodingInstantiatorProbe: probing level 1 interface 2 CEncryptedEncoding
    CBSDBackingStore::openDataFork: about to open /Volumes/kevin/busted.dmg
    opening /Volumes/kevin/busted.dmg openDataFork 1904
    CBSDBackingStore::OpenLockFriendly: mapping flags 0x00000002 -> 0x00000026 (locks are MANDATORY)
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    CEncryptedEncoding::copyHeaderInformation: inBackingStore->openDataFork returned 0
    CEncryptedEncoding::copyHeaderInformation: inBackingStore->getDataForkLength (stub header) returned 0
    CEncryptedEncoding::copyHeaderInformation: backingStore data fork length is 0x0000000278100000 (10604249088)
    CEncryptedEncoding::copyHeaderInformation: reading V1 header from offset 0x00000002780FFB04 (10604247812)
    CEncryptedEncoding::copyHeaderInformation: inBackingStore->readDataFork (stub header) returned 0
    CEncryptedEncoding::copyHeaderInformation: not recognized as v1 header
    CEncryptedEncoding::copyHeaderInformation: reading V2 header from offset 0x0000000000000000 (0)
    CEncryptedEncoding::copyHeaderInformation: inBackingStore->readDataFork (stub header) returned 0
    CEncryptedEncoding::copyHeaderInformation: reading auth-entry count from offset 0x0000000000000048 (72)
    CEncryptedEncoding::copyHeaderInformation: inBackingStore->readDataFork (auth entry count) returned 0
    CEncryptedEncoding::copyHeaderInformation: reading auth table from offset 0x0000000000000048 (72)
    CEncryptedEncoding::copyHeaderInformation: inBackingStore->readDataFork (auth entry count) returned 0
    closing 3 /Volumes/kevin/busted.dmg closeDataFork 1984
    max-key-count: 1
    blocksize: 4096
    uuid: 548A2877-86C1-4F17-877B-CF66BEEA6066
    version: 2
    passphrase-count: 1
    private-key-count: 0
    CBSDBackingStore::openDataFork: about to open /Volumes/kevin/busted.dmg
    opening /Volumes/kevin/busted.dmg openDataFork 1904
    CBSDBackingStore::OpenLockFriendly: mapping flags 0x00000002 -> 0x00000026 (locks are MANDATORY)
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    closing 3 /Volumes/kevin/busted.dmg closeDataFork 1984
    CBSDBackingStore::openDataFork: about to open /Volumes/kevin/busted.dmg
    opening /Volumes/kevin/busted.dmg openDataFork 1904
    CBSDBackingStore::OpenLockFriendly: mapping flags 0x00000002 -> 0x00000026 (locks are MANDATORY)
    (RW lock acquired)
    closing 3 /Volumes/kevin/busted.dmg closeDataFork 1984
    diskimages-helper: DiskImages secure mode enabled
    CEncryptedEncoding:unclockCANTHROW: trying to unlock with normal keychain
    UNLOCK: cannot find passphrase in keychain search list.
    UNLOCK: SessionGetInfo returned 0
    UNLOCK: sessionHasGraphicAccess
    UNLOCK: sessionHasTTY
    UNLOCK: sessionWasInitialized
    UNLOCK: using TTY to prompt for passphrase
    Enter password to access "busted.dmg":
    unlockCoreFromTTY: passphrase is wrong
    DIFileEncodingNewWithBackingStore: returning 0x00000050
    DIResolveURLToBackingStore: level 1 encoding match failed. 80.
    DIResolveURLToDiskImage: resolving backing store/file encoding failed. 80.
    status proc called: attach
    error code: 80
    status proc called: cleanup
    2008-05-12 18:11:41.081 diskimages-helper[1747:1603] DIHelperAttach performOperation: returning 80
    2008-05-12 18:11:41.082 diskimages-helper[1747:1603] -decrementBackgroundThreadCount: _backgroundThreadCount is now 0.
    2008-05-12 18:11:41.082 diskimages-helper[1747:10b] DIHelper reportresults: reporting {
    payload = {
    "result-code" = 80;
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    2008-05-12 18:11:41.084 hdiutil[1745:1c03] reportResultsToFramework: results are: {
    payload = {
    "result-code" = 80;
    2008-05-12 18:11:41.084 hdiutil[1745:1c03] reportResultsToFramework: _threadResultsError is 80
    2008-05-12 18:11:41.085 hdiutil[1745:1c03] reportResultsToFramework: disconnecting from helper.
    2008-05-12 18:11:41.186 hdiutil[1745:1c03] disconnectFromHelper: removing observers
    2008-05-12 18:11:41.187 hdiutil[1745:1c03] disconnectFromHelper: terminating proxy
    2008-05-12 18:11:41.189 diskimages-helper[1747:10b] DIHelper: terminateHelper: entry.
    2008-05-12 18:11:41.190 hdiutil[1745:1c03] disconnectFromHelper: terminated proxy
    2008-05-12 18:11:41.290 diskimages-helper[1747:10b] -DIHelperAgentMaster terminateUIAgentConnection.
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    2008-05-12 18:11:41.293 diskimages-helper[1747:10b] DIHelper dealloc.
    2008-05-12 18:11:41.294 diskimages-helper[1747:10b] -DIHelperAgentMaster terminateUIAgentConnection.
    hdiutil: attach failed - Authentication error
    kevin:~ kevin$

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