When it asks you the destination of Leopard install, go to the menu bar, and under utilities, there should be an option to restore from Time Machine. Click, and you should be set.
Yes. To restore using a time machine backup, boot from a Leopard or Snow Leopard install DVD and instead of installing, go to Time Machine in the applications menu. Then just select the last backup you made with Leopard and everything will be back how it was. I had to do this after my initial SL install (over my existing leopard install) didn't work out well. (All is well after I did a clean install of SL.)