Huntn -- that sounds about right. I had TrueImage 11 and I was able to create a backup image when running in a VM but not when booted into XP. When booted into XP, TrueImage 11 said my HD was a dynamic disk, which it did not support. Running as a VM, it saw the C drive as a plain old drive/partition.
I recently upgraded to TrueImage 2010 with PlusPack. The PlusPack offers support for dynamic disks as well as hardware independent restore (I figured might be handy for taking a VM to actual hardware or vice versa). I also upgraded to Win 7 and booted into Win 7 (with aero, no lag at all, and that's with Intel x3100 integrated) and was able to create a full backup image (.tib). Haven't quite figured out how to work the hardware independent restore, though.
I have used Winclone a few times with XP and have backed up my Win7 Boot Camp partition. I haven't tried a restore of my Win 7, but I restored a few times with XP and no issues.
Best of luck.