Hi Mark,
to start serious first, have a read here:
http://en.wikipedia.org/wiki/.dmg
http://en.wikipedia.org/wiki/.img
.. in the MacOsX world, an .img is normally an "image" (=copy) of a disk (as dvd or cd), done e.g. with iDVD; the .dmg (which translates as "disk image"...) is in many cases not the virtual copy of a whole disk, but in many cases contains a folder with lots of stuff (to install, for instance)
so, iDVD creates .img - which later can be "mount" as "real" dvds...
context-menu should create .dmg.... which also can be mounted....
ahhhh, it's confusing!
BUT...
...saved as a disc image in disc utility (to save space)..... that is mostly nonsense, because video IS allready highly compressed... you probably save a few bytes... I would let out that step.