Tom Yager, one of my favorite tech writers, has posted a great overview of how Time Machine works in Leopard. Imagine my surprise to find out that Apple's backup solution doesn't involve a Flux Capacitor of any kind! It does, however, involve lots of file copying, and clever disk space saving measures. Tom answers some questions about how much work you'll lose if you need to restore from a Time Machine backup (given the nature of how Time Machine saves files that answer varies depending on how far back you need to go). He also sheds some light on what, exactly, Time Machine is doing.
If you love your data, you should read this post.