A differential backup backs up the files that have changed or were added since the last full backup by looking for any files that have the archive bit set. The differential backup is different from the incremental because the differential does not clear the archive bit after the backup is done. This means that if you were to do another differential backup the next time you do a backup, the same files (and any new ones) would get backed up. As a result every differential backup will have all changes since the last full backup. To restore your backed up data, you need to restore the last full backup and then restore your last differential backup.
To view the archive bit in Windows 2003, right-click on the file and go to the properties. Once in the properties, click the Advanced button on the general tab. You will see the option that says “File is Ready for Archiving”. Whenever a new file is created or modified, Windows 2003 sets the archive bit.