Thanks, Mr_Noodle for the prompt reply.
I have been changing the rules to do a little "tweaking", which will cause the rule to re-run. (Question: Does creating a new rule which runs on the same folder trigger Hazel to re-run all of the rules for that folder?)
I thought I understood (through trial and error) how to make the process work correctly. I am already using both an extra processing location and some color coding as you suggested. However I am still getting duplicates. The thing I don't get is why Hazel copies a duplicate version of a file even though the "Do not copy if a duplicate" option is checked. I have that option checked on each step of the operation.
In one location the "Do not copy" is checked along with the "replace" button. This is in my processing folder. If I watch the folder as Hazel runs I can see that Hazel is replacing the file with a new copy of the file. These file names are the original ones and Hazel has not yet been asked to rename them. Although the name of the file doesn't change I can watch this taking place because I have the the file being colored yellow when it's placed in that folder and changed to grey once it is matched and a copy of the file is moved to the destination folder. Because it is replacing the file and not renaming the new one I don't end up with duplicates in the processing folder. But, because the file changes, Hazel then runs a separate rule on the processing folder to put a copy of the new file in the destination folder. Why would Hazel be replacing the file in the first place if the "Do not copy if a duplicate" option is checked?
The rule for copying the file from the processing folder to the destination folder also has "Do not copy if a duplicate" option checked, but with the "rename" button selected. In this case Hazel still copies the file over but appends the -1, -2, etc. to the end of the file name. Hazel must think the file is a duplicate if it is automatically renaming the file, yet it seems to be ignoring the "Do not copy if a duplicate" option which is checked.
Writing this all out has made me think of a new question . . . Would Hazel consider a file to NOT be a duplicate if the files were identical with the exception of the highlight color? I was color coding the files as they move around so that I could better follow what Hazel was doing. But if this is the cause of Hazel not knowing that both files are actually duplicates I may have to remove all coloring. I would hate to do that just as an experiment unless you think it is necessary, as the coloring is what makes it easier to identify and remove the duplicates when they are mixed in with everything else. And that's something I have had to do frequently.
I could send you the rules if you think you need to look at them. Or, I will run any test you think I should.