What do I have to make a backup of? And how do I do it? I've cancelled the installation twice already because it told me to make a backup and i'm scared that it will wipe out my OS because someone stole my CD and i won't be able to put it back on if it goes. I already have all my important pictures and documents on a cd, is that what it means? my personal files?

What to Know Before You Download and Install Windows XP Service Pack 2

3.
Protect your important files.
We strongly suggest you back up or make a copy of your important and irreplaceable personal information, such as pictures, documents, music, and financial data.


more tips

I also backup "system state" in the backup wizard. & then burn it to cd.

ps. (from that last link)

Use Backup to Protect Data