It is often useful to walk through your code with execution highlighting on while watching the task manager to find out exactly where you are "leaking" memory. It is easy to fragment memory using LabVIEW, since many of the array operations (e.g. build array) can do this. You can avoid this issue by preallocating arrays to their final size and then using subsets when you need them (you typically get performance gains, as well).
Queues are an excellent way to pass or store array data because they do not automatically make a copy of array inputs. This is why they outperform most other safe methods (e.g. action engines) in this use case.
A 1024x1024 array is really not that big. As Ben said, you can handle much larger sizes. For LabVIEW 8.0+, this is about 800GBytes. For previous versions, it is about 1.1GBytes. LabVIEW 8.5 is large memory aware, so you should be able to use over 3GBytes when running on Vista64. I have never tried this so cannot tell you how well it works. You can get more details and maybe some tips that will help by reading the tutorial
Managing Large Data Sets in LabVIEW.
