it is like a photocopy of your current system state. If you did a fresh install you would need to install windows, all the service packs and updates, your progs and then your files/documents. If you make a system image windows basically makes a copy of everything as it is now and when you put a new hdd in you can then use the windows dvd to install the image instead of the bog standard version. All your progs, documents and settings are still there just as they were before. You want to go into control panels, backup & restore and select "make a system image" on the left. I make one every two weeks and it normally take about an hour and a half. I would have a quick read of this if I were you.
http://www.pagestart.com/win7bckuprstrnhd072610.html
It might sound complicated it but it is very easy and self intuitive. Do you know how big your hdd is atm?