@mikeymike
it does both, actually. You can do it the old-fashioned way, the new-fashioned way, or do both at once. The best pixelshader effects I've seen have used vertex shading combined with pixel shading for maximum effect.
As Rogue pointed out, Doom 3 uses pixel shading for lighting effects, and it shines there. The place I find it most useful, however, is in water surfaces, adding a reflection to the surface.