Pretty good and simple way to deal with this is simply pipe it via gzip, something like this:
# dd if=/dev/sdb | gzip > backup.img.gz
This way your image will be compressed and most likely unused space will be squeezed to almost nothing.
You would use this to restore such image back:
# cat backup.img.gz | gunzip | dd of=/dev/sdb
One note: if you had a lot of files which were recently deleted, image size may be still large (deleting file does not necessarily zeroes underlying sectors). You can wipe free space by creating and immediately deleting large file containing zeros:
# cd /media/flashdrive
# dd if=/dev/zero of=bigfile bs=1M # let it run and quit by disk full error
# rm bigfile