Take an Airport Extreme 802.11n base station, add a 3.5-inch internal drive and modify the device's firmware to permit the built-in LAN to share a drive as a volume (a device) rather than a folder within the filesystem, and you've got Time Capsule. Apple has also done away with the power brick; Time Capsule's power supply is internal.
The reason for Time Capsule's existence is to compensate for a few unfortunate realities: Time Machine, wonderful as it is, requires desktop USB or FireWire drives. All of these have to be sized appropriately, which is no easy thing, and worse, notebook users have to remember to plug them in often enough to make the backups useful. Xserve is one fix, but it is a dear investment considering how fast one Mac can eat through a hard drive with Time Machine. Time Capsule fixes that. It is expandable via inexpensive external USB drives. You won't get breakneck speed, but if one Time Capsule gets bogged down, set up another. The Time Machine client lets you choose your backup destination.
Time Capsule does not precisely match the protocol used by Time Machine Server on OS X Server Leopard. The effect is the same: A network that includes a Time Machine Server and one or more Time Capsules populates a pull-down list of Time Machine destination volumes.
Time Capsule does allow users the full set of Time Machine abilities of doing point-in-time file system exploration. It also supports Time Machine's ability to perform a migration or restore from a Time Machine image.
Time Capsule's USB port still handles printer sharing. Except for the direct power input, Time Capsule's enclose is identical to that of Airport Extreme 802.11n. Time Capsule's base price is $299 with a 500 GB drive, and $499 with a 1 TB drive. Apple claims that it uses "server grade" drives, which I learned require special care compared to lesser drives. I carried a Hitachi DeskStar drive in an external enclosure and pulled it about two feet onto the ground while operational. It was shock-mounted in it chassis, but the drive was immediately destroyed. Server-grade drives don't park their heads by default. The next time I configure one, I'll see if it's an option.
I also need to test Time Capsule to see what the reasonable maximum number of USB drives is, and where performance starts to hit that part of the curve that says "buy a second one."