that's going to fail, and it should have already.
the size of the image would be the same as the system size itself. so if you're taking an image of a 700G setup, it's going to use up another 700G, which you clearly don't have on a 1.0TB hard drive. why it didn't flag this before is odd.
normally, an image of the system (C drive) is made on another drive, preferably a separate and portable drive that's dedicated to carrying backups of things. for example, I use a 1TB portable drive to store system images of all of my computers - they take up from 50G to 150G for each machine, times 4 machines, so I'm using up a good 300G just for images. keep two versions and the space gets used up even more.
cancel, get a separate drive, and save your system image to that.