Hard Drive Failing - Get A New System Drive?

My primary system drive where Windows 7 is installed is a: WD 7K 16M SATA2 WD3200AAKS HD 320G - OEM. Long version (feel free to scroll down to short version): Yesterday, I came back to my computer, and all of my applications and desktop were frozen, but I could move the mouse. When I clicked on a window, the cursor would turn to the blue spinning thing, and the window would eventually say not responding and turn a lighter shade of white. I couldn't click on the desktop of the start menu, so I did a hard reset. The computer then wouldn't pass the black "starting windows" screen. I did another hard reset, and it asked me if I wanted windows to try to repair start up. Soon after that, it asked if I wanted to restore windows, but when I clicked OK, I got what looked to me to be a memory error. Then startup repair seemed to do nothing for a few hours, till I got impatient and restarted the computer. I was able to get into Windows, and I scheduled a memory test, and reset the computer. Memory test ran and found no problems. I restarted and Windows loaded, but soon after my computer was laggy and the programs were freezing. So then I thought it may be a HDD issue, so I scheduled to run check disk on that drive, and reset. Check Disk found corrupt files and bad sectors. After that, I was able to load Windows normally, but when I tried to open MC7 for "Live TV", it wouldn't pass the searching for tuner stage, so I closed out MC7, and got an error message in the action center. So I ran chkdsk again. This time, windows wouldn't load after restart, so I went back into repair startup, and it seemed to have found the error really fast, restarted and everything seemed fine. I decided to run chkdsk one more time for good measure, and it had a couple more read errors and found more bad sectors. Now I have been running windows with no apparent issues yet.Short version, computer froze, ended up running chkdsk 3 times, had to repair start up, and now everything is OK for now, but obviously I'm worried about more harddrive failure. Here are my questions:

1)How troubling is this? Do I need a new harddrive ASAP, or can it run for years with a few bad sectors? Any further tests I could run?

2)If I am to get a new system drive, what should I get? All I have on it is windows and my programs. I have separate disks for data. I'm using roughly 32 GBs out of 298. Should I just try to get the same drive (same speed, same capacity), or is there a good upgrade and is it worth getting an upgrade (I don't need more space, but something that would help performance maybe?) or any good deals on sale now?

3) I bought my current (failing) HDD on 9/24/2008, and I'm pretty sure WD has 5 year limited warranty. Should I peruse that angle?

4)How should I got about moving/restoring this OS to the new drive?

4a) I have a half dozen Windows Image Backups saved. Should I just use an old one from before the failure, or should I try to create a new one now, even though the disk may be corrupt?

4b)Or is there a better program to be using than Windows backup and restore?