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You would only have one backup at the same location. You would not want to rename or move it. Doing so will make it unrestorable. You can still have multiple incremental backups if each one is saved in a different location.
Would moving the backup to another location temporarily (for archival purposes) and moving it back to the original location prior to restoring work properly? Also, does this apply to system images?
It's for both backup types. It seems that moving them period makes them unrestorable since Windows 7 cannot find them. It would not be advised. If you do, it would be best to just create new backup instead.
This means I need a separate partition for each backup that I do not want overwritten by the scheduled backup? Is there no way to assign the backup location to a specific folder?
So, if I change the settings of my scheduled backup to exclude the system image will it erase the existing system image?
Even with 221GB of free space letting windows chose how to manage space it still overwrites the old system image with the new. Is scheduling a daily backup the reason it cannot hold more than one image?
Any changes you make will be reflected in the incremental backup. When you restore from the backup, you will have the dated incremental backups to select from to restore with. Think of it being like restore points in System Restore.
If you no longer wanted the backup, then you would still have to manually delete it.