Yes, you should dispose the old object before you create a new image on top of the same variable. By creating a new image with the same variable, you are removing a reference to it. If there are no references to the old object, you are signifying that it should be picked up by the GC (Garbage Collector). Although technically, this "should" eventually result in the memory being freed assuming that the finalizer makes sure that non-managed resources are taken care of, this is a big assumption (You can't even really assume that the finalizer will be called), and it causes more work for the system. Non-default finalizers causes extra work for the GC in terms of garbage collection level promotion, resulting in taking longer for the memory to be deallocated, and the number of times the GC has to run to do so.
This is assuming that is all written to make sure the finalizer handles it. Anytime an object has a Dispose method (anything which implements IDisposable which BitMap does), it should be called before removing reference to the object (falling out of scope, removing reference to the object etc.).
Here is an article on how the Garbage Collector works in .net
http://www.devx.com/dotnet/Article/33167
Here is how MS says the dispose / finalizer should be implemented:
http://msdn.microsoft.com/en-us/library/b1yfkh5e.aspx
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