Backing up a system using XP's built in software?

Hi Chaps,
Am looking to fully backup my system including the operating system. Reason I want to do this is so if my hard disk fails I can buy a new hard disk and transfer all my old data over to it. I’ve been looking into using the backup wizard on windows XP which I have a few questions on.

If I backup the system state only what will this backup?
Will I be able to put a floppy disk in and set as first boot device then I presume i will be asked for the removable storage media i saved the backup on (DVD-R etc) to restore my operating system and files, is this how it works?
If so would I need to re-activate my copy of windows xp?
When I backed up my system state only it came to 455mb surely unless that’s compressed that can’t be my operating system etc as the windows folder alone is 1.2gb!????

Games and programs im not concerned about and all my documents are saved on my USB stick, I just wanted to use this method to save me having to re-install Windows if I had a hard drive failure etc. Sorry about all the questions, appreciate any help people can give.

System State is registry, hive files from Sleep Mode, etc. - not all of your Windows or data files. It's only useful if it is done every night or you don't install new apps very often and is made for specifically targeting corrupted registry issues. Your recovery options usually start from the boot CD - depending on what is corrupted depends on how XP reacts after the restore. I would take the above suggestion and clone the hard drive. You will probably find that it can save you time and frustration in the end.