The way I usually set up my Windows computers is with two separate volumes -- one for system + applications, another for data including Windows user profiles. There are several methods to moving the profiles; the easiest is changing the default user profile location by editing HKLM\SOFTWARE\Microsoft\Windows NT\CurrentVersion\ProfileList before you create a new account.
This is the obvious way when building a computer with multiple drives and/or RAID. Most people have a limited number of applications they want to install, but a lot of data.
The system volume doesn't need a lot of space, doesn't need redundancy (OS and applications can be easily reinstalled if a drive fails), but the total performance of the computer depends on it and it should be fast. This is where one would want to use a smaller high performance hard drive like
the WD VelociRaptor,
solid state drives, or even a few of the above configured in RAID0 for top performance.
The data volume doesn't need to be as fast, but it needs to be large and possibly redundant (if your data is worth the added cost and you don't want to lose it to a drive failure). This is where one would use large slower drives like
the WD Caviar Green, in RAID1 or RAID5 configurations to provide redundancy (when there is more than one).
This isn't over-engineered. If you push your desktop computer hard and have a lot of data, this is how you would ideally want it.
If you are working with a single drive, the performance vs. size and reliability considerations do not apply, but you may still want to partition it according to the same principle. It makes it easier to reinstall the OS should you need to, as well as simplifies backing up data if you are going to do that.
The only downside to partitioning is people new to the concept often estimate the relative sizes completely wrong for their needs and end up running out of space on one volume while wasting lots of it on the other. Most often they overestimate the required size of the system + apps volume by a huge amount; it really doesn't take much.
