Great question! You'll notice that when you create a Continous Incremental job, that the GUI tells you that such a job will require the use of the ImageManager tool. ImageManager is a deceptively simple tool (well, it's simple to set up, but its underlying functionality is complex) which you can point at a directory of image files for automated maintenance. ImageManager will automatically clean up older image files for you, collapsing them together. The setup installer for ImageManager is installed at the time you install ShadowProtect - just check your ShadowProtect programs group on your start menu. Also, when you install ImageManager, make sure that you specify a password at install time (don't just leave the default "0" password in the ImageManager setup wizard's password page). When you run the ImageManagerClient.exe GUI, you need to use the menu item to connect to server (usually localhost) which you wish to manage. When connecting, specify the same password that you set at install time. After you are connected, create a new policy, and point it to a local directory that contains the image files you want to manage. You can point it to a UNC/network path as well (as opposed to a local path), but in that case you'll need to make sure that the NT Service account used by the ImageManager NT Service has access to that UNC path. I typically suggest users leave the default settings in the new policy dialog and simply specify the path to the files they want to manage.
Here's another post on this subject with a nice pic that helps to illustrate how the collapses tie the various files together in such a way that the lengths of the chain from any file back to the base are optimized (minimized) and hence the amount of data that must be processed to access data (for restore or mount) for a given point-in-time is also minimal:
http://forum.storagecraft.com/Community/forums/p/171/491.aspx#491
The pic is a little out-of-date because it is missing the "Synthetic/Collapse Monthly Incremental" files that are created, but at least it helps to explain the basic idea.