If you can fit the image onto a DVD-R, and you have a second DVD drive to read from, yes. Remember, though, that since you're booting from the DVD drive (the Panther install disc), you can't remove the DVD from the primary drive...

Note that you can also store the DMG on an accessible web server and access it over the network (even personal web sharing will work).

Give this a try, of course, before you rely on it in production. Try booting from the Panther install CD as I indicated, and run Disk Utility from there. Check out the options available from the Restore tab... and best of luck!

Is this a 1:1 ratio for space needed, or is there compression avaliable? (ie. I have a 160GB mirrored RAID array... I would need a 160GB external drive for back up)

While the image itself can be compressed at approximately 2:1, you need space to hold both images when creating it. So, if your 160GB RAID has 100GB of data, you'd probably need 150GB of space, maybe a bit more, during the backup.

Of course, you could create a sparseimage and backup into that, then do the conversion "by hand" onto an alternate volume... depends on how tolerant you are of these kinds of things.

But, for ease of use & simplicity, I'd have a 160GB external FW drive and just backup to it, then Smart Update subsequent times to ensure everything's up to date.