[SOLVED] To update can I....
 

just install 3.5.1 over the old files or do I need a new folder and then go back through and change all the settings in the new version to what I had in the old version. I would imagine it's the latter as simply reinstalling ontop would like write over the modified files, but I don't know for sure. Thanks.

The theme SETTINGS are stored in the wordpress database. The theme CODE is what you put in the theme folder. You can have two copies of the theme CODE in the theme folder as long as they have different folder names (like atahualpa346 and atahualpa351).

Whichever version of the theme CODE you activate, it will use the same settings in the database.

The only thing you may need to do is copy your header images to the new version of the themes images/header folder

Done and done. Thanks again. The theme is super.