The issue with the Out of Memory Error and BAIL errors after installing MIIS SP2 or installing ILM 2007 can be resolved with a Hot fix:
I had to request these from Premier Support as they were not available on the KB.
This brought the version up to: 3.2.1001.0 (Service Pack 2)
This has resolved my current issues after applying SP2.
Brad Turner picked up more details from PSS on this error which you can read about here