Rather than reinvent the wheel, I will quote one of the ATE team members from SearchStorage.com, Jim Booth:
As a backup practice, both incremental and differential backups accomplish the same thing: They allow you to reduce the resources needed to backup data. But how they accomplish this task is different.
If archive bits are cleared after each backup, this is called an "incremental" backup. If the archive bits are cleared only after a full backup, then this is a "differential" backup.
An incremental backup clears the archive bits each time data is backed up. This means that each backup will be small. To perform a restore, a copy of the last full backup and each incremental will have to be restored to get all files to their last known state. In most cases, a full backup will be performed weekly while an incremental backup is performed daily.
A differential backup clears archive bits only after a full backup. This means that daily backups get gradually larger, but restore is easier. A full restore only requires the last full backup and the last differential.
Incremental backup allows for a more granular restore, but differential backups are typically easier to restore.
Full backups accomplish exactly what it sounds like: they back up all files in a given backup set, and reset the archive bits on all of them.
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