Actually, we've been continuing on the same instance since 2009. We keep past courses on the system for one semesters + 5 weeks from the time when the course ends, so Fall 2011 courses will be deleted beginning this week.
In this way, faculty can always reach back to their previous Fall or Spring courses to backup/restore to the current semester's version of that course.
We're still on 1.9, and space management has gotten to be the issue. The replication of course files (moodledata) is now selective, fetching only those course directories that are in the current semester--I've modified the backup cron job to only look at certain course categories, and the rsync uses that to filter which directories are copied (this will obviously require a re-work for 2.x).
The answer to your last question though, is yes. At the end of the semester, the most recent course .zip files go onto tape, and I keep a manifest of each tape's contents.
We've had to pull a few from tape, for courses going back more than a few semesters.