Archive and Install will delete your /System and /Library and /User folder (if you have that little box unchecked, which I recommend because it'll create a /Previous Systems folder where you can drag home folder's contents back into place. If you check the box, the /Users and /Library will not be deleted and I recommend the /Library be deleted so I always suggest the check box being unchecked). You can manually delete your /Application folder and an Archive and Install will restore all apps deleted. Otherwise Archive and Install replaces apps in there with the ones on the Disk, so your 3rd-party stuff won't be deleted.
So the rundown,
Delete your Applications folder (unnessary, but you might want to do it?)
Boot off of CD/DVD
Do an Archive and Install (with check box unchecked)
Booting up will give you the Welcome screen, make sure the short name is the same as it was before.
Drag the stuff from /Previous Systems/Users/shortname to /Users/shortname
reboot
sudo rm -r /Previous Systems
Software Update
Repair Permissions
I've reinstalled OSX numerous times, and this is the best way I've found to keep your data and reinstall the OS (Unless your hdd is failing). I suggest keeping the Archive and Install check box unchecked because otherwise it'll keep stray /Library files in there, which may cause a problem. It also saves time copying your stuff to an external hdd because the drag and drop thing from the same hdd is instantaneous.
