I recommend only using Network Failover if you cannot physically use the serial failover cable. If you use both, they both have to fail to trigger failover, and the serial is much faster than the Network Failover.
VLAN Failsafe is actually totally self-contained as iodaniel says. All it does is watch for traffic on the specified VLAN. If it does not receive any traffic for half the timeout period, it tries to arp for an address on that VLAN that it knows about. If it does not receive a reply within the rest of the timeout period, it takes the action specified (reboot, go standby, restart services). The peer is not involved at all. However, when the peer detects that it's partner has failed (either via serial or Network Failover), it will become active.
There is no messaging from the active to the standby in a failover situation, whether serial or network-based. When the active unit fails, voltage drops on the serial and it stops sending TCP 1028 packets. Failover is totally reliant on the standby to detect the other unit's failure and go active.
Denny