The system state includes the registry, boot files and other Windows files. It helps restore Windows to its previous conditions.
Take the registry. This is the database that tells Windows how to run. As you add programs, the registry is changed. It tells Windows what programs are available and where to find them. Over time, Windows is customized to your liking.
Your most likely catastrophe will be a total hard drive failure. In that case, you would reinstall Windows on a new drive. This would be a clean installation; Windows would know nothing of your previous installation.
By restoring the system state, Windows is again set up your way. That is the pro of the system state backup.
The System State backup is similar to System Restore. This utility allows you to step back in time. Say you install a program that makes Windows unstable. You use System Restore to select a date when Windows was fine. System Restore will return Windows to that date.
Your personal data is not affected by System Restore. Only the Windows system files are changed. I have more about System Restore on my site. It's actually a slick little utility.
But should your hard drive fail, System Restore would not help you. Its restore points would be gone, along with everything else. However, your system state backup would be safe because it's not saved on the hard drive.
Backups should always be kept somewhere other than your hard drive. That could be on a second hard drive or a DVD.
System State is not well known. So I'll explain how to back it up. First, open Backup. Click Start>>All Programs>>Accessories>>System Tools>>Backup.
Establishing the system state backup is easy, though it requires several steps. The Backup utility gives you one of two looks. The default is the Backup or Restore Wizard. To use that, click Next. Select "Backup files and settings." Click Next. Select "Let me choose what to back up." Click Next.
This will put you in the Items to Back Up window. Click the plus mark next to My Computer. Three boxes will open, including System State. Select that and any other data you need to back up. Click Next. Select your backup device, name the backup and click Next. Follow the wizard to complete the backup.
When you open Backup, you may get the welcome window. If so, click Backup Wizard (Advanced). When the wizard opens, click Next. Select "Only back up the system state data." Click Next, and follow the wizard.
Or, you can back up other data along with the system state. To do that, select "Back up selected files, drives or network data." Click Next. Click the plus sign next to My Computer. Check System State and any other data you wish to back up. Click Next and follow the wizard.
I have to tell you, though, never once did I use a System State backup on a new drive. I just did a fresh install of Windows and restored my most important files such as my photos, documents, spreadsheets and the like. Plus, how do you really know that the system state is in the best state?