requirements for Complete PC Backup feature?

Hello,

I'm about to purchase an external drive but still had one last issue to work
out for my situation.

I read up on a post by Degutis
(http://professionalinsight.net/VistaBackup.aspx) and found this statement
interesting: "The size of the drive used to store the backup image does not
need to be the same size as the drive being backed up. It just needs to be
large enough to hold all of the data which is often some fraction of the
entire drive."

I need to clear up a slightly ambiguous phrase (at least for me) regarding
what is really "large enough". Also, I'm slightly confused about "backup
drive" vs. "restore drive" terms. If I have an external drive that I backup
to, would that be the backup drive and my current internal drive would be the
restore drive? Or is the external drive from which I perform a restore from
considered the restore drive and the drive I originally backed up considered
the backup drive?

Regarding "large enough" concern. Let me explain my situation as example
and let an expert out there determine what size drive I need for my new drive
I need to buy for storing my backups to. My main C: drive is a RAID 0 1TB
setup (across 4 physical drives). Currently, I'm only using less than 25% of
this capacity. So, do I need to buy an external 1TB drive to perform my
backups? Or can I get away with a 750 or even a 500 GB external drive in the
short term just to get full complete PC backups because the total used space
currently is about 250GB of space on my C: drive?

The reason why I am motivated in getting a smaller USB/eSATA external drive
in the short term is that long term, I want to move onto Windows Home Server
(to be released fall 2007) for my PC Complete Backup needs. From my
understanding, any extra USB/eSATA drives you've accumulated over the years
can be piggybacked onto these WHS appliances to boost up its data pool which
can be used as centralized data/backup server (i.e., probably via NAS/DAS
hybrid technology a la SAN, a la iSCSI...but I speculate as I'm not a beta
user of WHS).

Cheers,

JD Fagan