HDD Smart drive failing, biohd-8 error


Hey guys,
I referenced my problem in the subject line of the thread. I'm assuming this means my HD is failing. With that said, I have already purchased an external HD and I think I have backed up most of my information successfully. I used Driveimage XML to backup...is this ok or not? Anyways I guess my question is, if the backup was successful, what are the necessary steps to take moving forward to ensure that my computer returns to normal and operates properly? Do I need to replace the internal HD now? What do I need to do about my OS? Is there a way to clone it over to the external HD? What do you recommend?

Desktop Computer
HP p6130y
Where you run DriveImage XML? BartPE? If your hard drive is failing you'll need a replacement internal drive too. You'll also need to have your OS disc handy for re-installing the OS on the new hard drive. Last step would be to use DriveImage XML to restore your personal data on the new hard drive and re-install applications/updates.
I ran it to the external HD...i do not have my vista OS discs. However, I do have XP but would installing that cause me to run slower?
XPs old. If this copy of Vista was OEM you might be able to get a replacement recovery set, otherwise I'd recommend getting a copy of Windows 7.