I don't think you can use Disk Utility to archive your startup volume while booted from that volume. I think Disk Utility uses a block-level copy and wants to unmount the volume before imaging. If it can't do that, it probably isn't going to work. If you boot from an install disk you should be able to create the DMG.
The various clone tools (SuperDuper! and Carbon Copy Cloner) can clone a running system.
As ridiculous as your answer is, it appears as though you are correct. Sorry but... how stupid is that? It completes the imaging without a single error, only to produce a corrupt image file? Are you kidding me? How long has Disk Utility been around? They couldn't program a message into it? Concerning a process it cannot successfully complete? I should've just used dd.
Anyway, thanks for the correct reply.
This solved my problem: doing a disk-level copy of the dmg file:
I booted up in recovery mode (hold cmd+R when booting up) and ran the commands in the Terminal.
I also had to unmount (umount command) the drive I was copying to (my only internal drive, /dev/disk0).
I had created a dmg of my entire disk drive using Disk Utility. After reinstalling OSX, it wouldn't restore in Disk Utility with "no mountable file systems" and "internal error" errors. After almost giving up and assuming the dmg corrupt, I came across the above link.
An hour or so later (128GB drive, 80GB dmg file), dd was complete and I rebooted back to my exact installation!