Does Titanium Backup's update.zip restore all apps AND data?
No, the update.zip does not restore all your apps. The purpose of this is to allow you to install Titanium Backup as a user or system app while in the recovery bootloader. You would wipe your phone, then install a custom rom (as usual), and afterwards would install Titanium Backup.

This is to greatly simplify restoring your system data. Normally, you would have to boot the new rom, sign into the google play app, download TB, then run a restore. This way, you can simply open TB as soon as you boot and restore everything, including your google accounts and wifi passwords.