[dnanian]

OK, the big problem here is that a DMG is read-only, so you can't use Smart Update: that was a one-time deal. If this is an HFS+ volume, I'd really back up to it directly (I don't think it is, though, as you'd run into FAT32 limitations with the backup so large).

If you want to use an image, use a Sparse Image as described in the FAQ under "How do I update an image?" That will let you isolate the backup in a single file and update it, too. It can't, however, be compressed -- but it can be encrypted.

Regarding Smart Update's reliability: it's extremely reliable.