Time Machine not a true backup?

This past weekend, I happened to notice that 3 Events in iPhoto from last summer were missing, about 500 photos worthy. I did extensive system searches, but couldn't come up with anything. So I tried to restore them from Time Machine, assuming that at some point, my toddler must have deleted them from my current iPhoto. But even the oldest backup on my Time Machine, which was from April, didn't have them.

This leads me to a few conclusions. Tell me if I'm thinking correctly:

1. The missing Events must have been deleted before the oldest back-up - meaning they got deleted sometime before April 24.

2. I've had my Mac since December, but in June, I was notified that the external hard drive Time Machine was using was full. I gave Time Machine the go-ahead to start overwriting the oldest files.

3. But it appears that because I was overwriting backups, I also permanently lost my pictures.

If those assumptions are all true, then:

1. The external hard drive Time Machine is using is 150G. Is there a way I can use that space more efficiently so I have more than a four-six month window into the past?

2. Maybe most importantly: It seems like Time Machine isn't really a great back-up system. It doesn't have an archive of every file I've ever had - like the old HP Simple Save drive I used to use with my PC. It only has archives from the last few months. Do savy Mac users use a separate hard drive - or the Cloud - to store file duplicates?

I'm sick over the loss of my pictures, but I've accepted there is nothing I can do at this point. I'm trying to make sure it doesn't happen again. I feel like I trusted Time Machine and it let me down, but that might be because I thought it was doing something that it really wasn't.

Many thanks.

Kelly