RE: Cheapest/Easiest...
RE:
"I would ust add a firewire or USB2.0 External. Move all your Data to it and then your local drive will have space again."
I second this as good advice.
The easiest thing to do is leave the internal drive alone, and just add an external drive. It can serve as both a bootable backup drive and for general storage as well.
I would recommend setting up your first external with a drive that is 2x or 3x as large as your internal is now.
Then, partition it at least 3 ways:
First partition: about equal to the size of your internal. This will become your "bootable backup"
Then split the remaining space as follows:
Second partition: offline storage, for large media files that might otherwise clog up the internal, stuff that is less important, etc.
Third partition: kind of a "scratch". You could use this to install a new system perhaps - such as an experimental install of Snow Leopard, to be sure it works before going whole hog.
I would also recommend that you be very careful about whom you buy from. I would avoid Maxtor and Western Digital. Seagate hasn't been too bad lately. I happen to like the Other World Computing line of Newertech miniStack drives, because of the extra ports they offer.
If your iMac has firewire 800, MAKE SURE you get an external enclosure that has FW800 as well.
Final recommendation:
DO NOT use "Time Machine" to create your backups.
Use "SuperDuper" instead - it is a SUPERIOR choice.
Time Machine cannot create a bootable backup drive, it literally eats up your drive space, and - since the drive has to be left running - it burns up backup drives, as well.
Get SuperDuper, and you will not regret it - ESPECIALLY if the time comes when you MUST boot from your backup due to a problem on your internal drive.
- John