1. ur laptop can support up to 120G HDD.
2. ur laptop can work better with a larger HDD.
3.u can install software/OS on ur new HDD after replacement, then u can migrate old data in the 40g HDD to ur new disk. u may try ghost clone, but i dont think it is good for your stable system.
4. the recovery CD can be applied on new disk. it can help to build a new system within minutes on the new HDD.