The Windows System backup was introduced in Windows Server 2008 which allows the capability to backup entire volume(s) on a server including the operating system. It could also be called "imaging". backup software intergrates with this Windows feature to backup the entire volume image(s) to our off-site servers. If you are using the Windows System backup type, then you don't really need to backup the "System State" as it is inlcuded in the "Windows System".
The "System State" backup type includes all system related files, registry information, and Active Directory (if it is a domain controller), but does not include any other operating system related files that can be reloaded from the installation CD/DVD. The System State backup of a Windows 2008 server (done now via WBAdmin) is considerably larger than the same backup on a Windows 2003 server (done via NTBackup). The average size is around 11GB before compression.