It's a bit of both, I think. It's both a backup system to safeguard against drive failure AND a rollback system so you can retrieve stuff you deleted or changed by mistake.
Time Machine backs up everything, so yes you can restore your entire system in the event of a complete drive failure. Replace the drive, install Leopard off the DVD and somewhere along the installation routine it'll ask you if you want to restore from a Time Machine backup drive...
The cool aspect of Time Machine, though, is the a la carte restore functionality - that's what you see demoed all the time.
Using apps as the front end for traversing the backups and restoring data is a stroke of genius, I think. We deal with a lot of stuff that we don't think of as "files", and even though they are stored as such we don't really know where these files are hidden away. Would you know which files on your harddrive you need to restore in order to get back an Address Book contact? No, but now you don't need to.
Apps can be made Time Machine capable, which allows them to present their current window in multiple versions with different data sets for different days (i.e. the daily Time Machine backups). The Finder can do this, allowing you to restore files from the backups, but they've also demoed this working from inside Address Book and iPhoto. I'd guess that most Apple apps will be Time Machine capable once Leopard is released.