Hi Octane,
The general rule of thumb is only to backup your files, and only you know where you store those !! Don't bother backing up software or Windows system files...... you should always re-install those from scratch as they make changes here there and everywhere (e.g. registry etc.),so you're unlikely to make a proper backup of them, and even if you do, you'll end up with a massive bloated backup.
Might be a good idea to backup your profile folder (i.e. Documents and Settings\<your username> or whatever the Vista/Win7 equivalent is), as this will have your customisations plus hidden folders containing Outlook data etc. You can't backup your profile whilst it is in use, so logout and login as a different user.
Some people like to backup the system state too (i.e. registry data etc.) .... you can do that safely and easily using the Backup tool Microsoft provide.
The other option is just to take the lazy approach and image the whole disk.
But basically, the whole point of a backup is to protect the data you value ..... in other words, in your mind you should be thinking "who cares if it takes me a couple of days to get my desktop colours and other tweaks back in place ...... all I really care about is my photo collection/email/whatever, as unlike software which can be re-installed and re-configured, they cannot"