'Back up your system' ??

I want to install the recent MS patch, service pak 3.  when downloading the message says 'close programs and back up system'.  so i close the programs but don't quite understand the back up system.  back up to where?  onto a peripheral, onto a new partitioned drive.  help me please, i could use the service pak.  thanks.

Make a restore point before updating. If you're using XP just click on your desktop, hit F1 and then choose "Undo changes to your computer with System Restore" then choose "Create a restore point", name it something like "before_update".
Do your update and if it hoses you then just repeat the above steps but choose "Restore my computer to an earlier time", navigate to your saved restore point and viola, all better (hopefully...).

If you're not sure about whether to let Microsoft install particular updates - don't. As long as you have updates enabled (from the Windows Security Center), anything important will install itself automatically. Anything that Windows asks you if you want, you probably don't need it, and in some cases may be better off without it (for example, "Windows Notification Advantage" or something like that - I forget the precise words - which would, if installed, use processing power to prowl around your system trying to sniff out evidence of you using a pirated version of Windows.)