Time Machine Restore with downloaded Lion 10.7

Hello,
I have a laundry list of questions, I hope you answer one for me, thanks.
My system disk has version 10.6.2 , and I'm pretty sure when I booted from this disk,
it presented a large icon saying it was 10.7, is this true or imagination?
Anyway, I had some sort of virus or other problem that forced the imac to keep
flashing the restore window modal panel, I couldn't resolve it by clicking on anything,
so I did a restore from a month old backup.
Questions
It restored the system to 10.7, because that's what the backup copy was.  But,
booting from the disk and following through the prompts, it was asking if I wanted
to continue and instal version 10.7, (from my original system disk), how is this
possible?  Or rather, this confused me, because I didn't have any idea what version
number coresponded to the latest Lion(10.7)
So I opted to do the Time Machine restore.
So, did I have to use time machine, or could I have continued with the system disk instal,
and gotten the latest version 10.7, AND not lost all my files since this last backup?
I lost some files, and I don't think I would have needed too.
So far it looks like all my software has been restored, and everything Mac seems to be working.
Parallels isn't quite working yet, but it looks close.
Thanks again for any info.
Your heart really does start to beat when the computer starts getting dodgy...

How do I restore my entire system?
Regards,
Colin R.

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