I am using SP3.2 doing continuous incrementals and using Image Manager at several sites. At some of the sites, the backup destination is to a USB storage device or remote NAS share. I treat these devices as "insecure" and encrypt the backups using a password/keyfile.

 It is my understanding that in order for Image Manager to function correctly, the .spk file must be in the same folder as the backup data. However, this creates a security issue as having both the encryped data and keyfile in the same place effectively defeats any security if an unauthorized person gains access to the backup location or takes physical posession of the backup device.

 Is there a way to do continuous incrementals and have Image Manager use a keyfile stored in another location?

The key file cannot be used to mount or restore an image file, only to verify and collapse.  An unauthorized person would have to crack the key file to get the actual password in order to get access to the data in an image file.