[dnanian]

Apple image management tends to not re-use free space in the image preferentially, so the image will eventually grow exteranlly, even though the internal space is smaller. It will only grow to the size of the original drive.

You can recover space in the image using hdiutil (search a bit on the board and you'll see how), or you could also use Disk Utility to create a sparse image with a much smaller maximum size and point SD! at it...

Hope that helps.