An image is a copy of everything on a disk or partition. If you used an imaging software like Acronis you would make a copy of everything. You could burn the image to DVDs or to another hard drive.( internal or external). Once you have the image, if you had a problem that corrupted your computer, such as a hard drive failure or a really bad virus, all you have to do is format or replace the drive (or partition) and copy the image back to the drive (or partition) and you are up and running just like you were when you made the image. This is better than a backup because you wont have to reinstall all your programs and set up your email etc...
So to answer your specific questions. Yes you can image the operating system, it's more complete than just backing up files and yes there are software programs that do this.
Good Luck/