I don't have any free tools to recommend. With that in mind...
1. Many of VMWare's commercial tools have built in capabilities for storing multiple revisions of a computer configuration in as little space as possible - each different install can be a change set keyed off a previous install. Of course, you have to stick to virtual machines for this to work.
2. For my day to day personal Windows hardware I use DriveSnapshot ( http://www.drivesnapshot.de/en/home.htm ). It can perform image backups of the running system (even the boot disk). In addition, it gives you the ability to perform Differential backups which store only the changes from the root backup. It also is able to reduce IO on the differential backup by a) only reading allocated space on the source drive and b) storing a hash file for each root backup so that you don't need to perform as much IO on the backup target volume.
You can download a 30-day-ish trial for free. After 30 days, you can still restore from those backups, but if you want to continue to back up, you need to buy it.
It has some super sneaky hackerish administrator-friendly capabilities. e.g. the same executable runs in both windows as a GUI and DOS (even a DOS floppy) as a command line, you can create network boot disks for network restores from a samba share, etc.
And lastly, the author (Tom) is good at responding to email.
-brendan
And on the seventh day, He exited from append mode.