I exported my wordpress blog as a .xml file as a way to manually back it up, and was shocked to see that the file was 1.14 MB... It stored my whole website, including about 300 MB of photos, in 1.14 MB? Does this file actually include all of the photos/media, or just pointers to where that content is stored on the Wordpress servers? Is there a way to actually include the media in the .xml file so that I have fully updated my website?
Wordpress exporting only includes the database entries for your site. Upon importing an xml file to another Wordpress installation an option is given to copy media from within those posts into the new installation.