Here is a link on how to get Windows Backup working.
linky
Bascially, if you use Windows backup and have a catastrophic failure, you will be forced to install a fresh copy of windows (and windows backup) then do a restore. Not a friendly way to go about it.
If you go 3rd party (for example Acronis, or Ghost, or Drive Image) they usually provide bootable CD's which could then be used to do a complete image restore.
Personally, I think removable external drives are the way to go with backups if you can swing it.