I recently had a disk go bad in my iMac. The disk would often boot if the computer was cold but then would start having errors as it warmed up and ... corrupting files.
I have never had to test any of my Time Machine backups for a real purpose. I was concerned that I would find that not all the files I needed would be restored or I would find I only really had partial backups. I have had many bad experiences over the years with untested backups, including backups done by sys admins. So I doubted that Apple's magic backup would be complete.
So I stuck a blank hard disk in the machine and booted the 10.5 install CD. At this point you have two options, install a fresh copy of Mac OS X and restore your files and settings, or just restore everything from Time Machine. I chose to restore everything from Time Machine, started it and went to bed.
I was pleasantly surprised to find a complete restore. I had to resync my dot mac data and a couple little things. The worst one was the ~/Library/Caches directory was not created with permissions for me to write to it. But overall, I was very happy.