I first encountered this feature when I was using an early development version of Lion and accidentally clicked on the Time Machine icon in the Dock while going for the System Preferences icon. To my surprise, Time Machine showed a history going back a few days. It appears that Time Machine keeps up to a week of local backups, and once connected to an external drive, those changes are synced to the vast library of items on that drive.
The image at the top of this post shows the Time Machine window as of last night, with the local backups going back to Wednesday, July 13. I was able to recover some screenshots that I took on July 15 with just a click.
Of course, this offline backup capability could backfire if Lion's Auto-Save capability accidentally saves over a document you don't want to change. Apple thought of that -- in the preferences for Time Machine, there's a setting to "Lock documents X weeks after last edit" (see below).