If you are low in space then I think it does as you say although I've never run into the problem in practice. It would be interesting to create a backup set and take it down to the wire space wise to observe what happens.
I was really trying to make the point that Windows Backup does pretty much what it says on the tin :) I've found it reliable and very easy to use.
I thought I would add these as its relevant to the way Windows backup behaves. I've noticed that the single folder created for a backup run (whether it contains 1 or 100 runs of the backup utility) when deleted does not return all the space used.
These shots show in turn:
The partition after all backups have been deleted. Something unseen is still taking up space.
A disk clean changes nothing, what does have an effect though is using the 'more options' and deleting 'Shadow Copies'. Some space is still used however. I don't know what that is or why.
Finally I format the partition and that of course gives all the space back... ready for another sequence to begin.
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