[dnanian]

You can use images to do that, yes. With 10.3.9 or later, DMG creation is less reliable than it should be: conversion fails randomly due to some kind of bug in the imaging frameworks.

But, if you use a Sparse Image, you'll be able to do it without any trouble, assuming that you have something to boot from (it sounds like you have one volume you can boot from no problem).

Most of this is covered in detail in the various "restoration" chapters in the User's Guide, so check that out, too!