My way
Image creation should be done after installing your main apps - not everything. I like to have XP, Office, A/V and Nero in my image - the other stuff can be done later, as long as I have my main progs imaged...
You can also create images in stages:
1. After first boot up of a brand new install
2. After installation of all your drivers
3. After installation of Office, A/V, Firewall, Nero etc.
4. Once a week or once a month thereafter.
5. Use High Compression in all instances. Saves half the space.
Operating System, Drive C, no larger than about 20Gb. Mine is 10Gb.
All other Applications like games are installed to the Drive D partition of the same hard drive.
The best situation imo is to have extra hard drives installed denoted as E, F ... etc.
Optical Devices G, H ... etc.
First thing I do after installation is to Right Click the My Documents Folder on the Desktop and move it to one of the Storage Drives. In my case E. You will just need to create the My Documents in that Drive first to do this.
So to recap.
Hard Drive 1 - C and D:
C - 10 to 20Gb for XP and Office etc
D - Installations. Games, programs etc.
Hard Drive 2 - E:
My Documents
Storage
Music
Pictures
Email Folder - in my case Outlook Express
Hard Drive 3 - F:
All the images of Drive C in it's own folder with descriptions and dates.
Backups of Drive 2 and any other backups you may need from Drive D, for instance I have my Counterstrike Game installed to Drive D, but I keep a backup of the folder on Hard Drive 3.
Also to keep
DVD Backups of some of those Images.
Plus all your Documents, Pictures and Music Etc.
I have found it best to keep the windows installation drive, C, as small as possible, not only for easier and quicker image creations and storage thereof, but windows will run better without all the clutter.
There are many other tips to keep your installation healthy and fresh, some mentioned by all the other posters.
Good Luck with your installation.