Corvus Elrod at Man Bytes Blog has some good thoughts on the use and misuse of character's backstories in games. Read it in these two posts.
This reminds me of important thoughts that were brought to me lately: namely that objects or beings are not as powerful as the connection between them.
A character in Marie Jakober's fantastic novel The Black Chalice, explains that magic is not in the things themselves (amulets, statues or other sacred objects), but in the links that connect these objects and beings. Objects possess no magic as long as we do not believe they do. To me, Corvus' point is very similar: Characters bear very little importance as long as they don't "act" and "interact" with other characters or objects in their environment.
The magic at work here is meaning. Take two random characters and put them side by side and it's just two characters standing side by side. But make them look at each other as if they were in love, or in competition with each other, or one is annoyed and the other is sad, or whatever... And suddenly, it's not just two characters standind side by side anymore: a relation is created, suggesting previous actions and events to come. Time is created. Meaning is created. A story is revealed.
So yes, "shut up about yer damn backstory!", don't be litterate about it. The backstory is for YOU, the writer. The story is for the others, those who listen. Know your precious characters and use what you know to make them mean something through their actions and reactions. Make them ACT!