Right now I backup using PowerArchiver; I have a backup script that executes every morning at 3:30AM that backs up my project folders, and compresses them into a dated 7-Zip ultra compressed archive on my external 160GB disk; the files I backup are a "mere" 500-750MB or so, and compress down to about 250MB. I usually keep about a week or so worth of backups, usually more. One reason I do it this way is because my externals are 500GB and 160GB, the 500GB is "well used", being it's the old drive that would still boot if I put it in my old PC; and these are far too small to backup my 750GB C: drive and my new 1.5TB D: drive, so I have to resort to the "picky and choosy" method, which is pretty easy; a single folder on drive D: is personally all I care about. It contains my life's work, and losing it once was enough! PowerArchiver isn't a free program, but there are many free alternatives that can image drives in a compressed form as well as archiver programs that can compress a subset of a drives files, and of course the backup programs included with windows XP Pro and higher work just as well, too.
I'm personally only really big on backing up things that I cannot easily replace; I can easily reinstall windows, office, etc from my CDs, and redownload the other various applications, but rewriting the program code I have could take years... that's not even an exaggeration; I lost almost all of my projects after a hard drive failure (well, after a series of hard drive failures) and I've only re-created three of around 20 projects that I had. The three I have recreated are many many times better, and I doubt I would have rewritten them to be better had I not lost them to begin with; but, I don't think I would like to see if I can duplicate that effort today...