It will take a snapshot of your entire system, registry, program installations, the lot, EXCEPT your personal documents and or music or image files (pictures).
So if you did a restore.. your documents wont be replaced or deleted.. BUT it will delete or replace any URLs added to your favourites
If you make a restore point, install some software then go back (by restoring). The software you installed will physically be there (ie.. the folder in program files will be there, but any association, and registry entries will be gone. This is good cos if things go wrong you can wipe the folder afterwards safely.