it leaves all your docs, music, photos, movies etc. but make sure before you archive & install that all your important files are in your home folder.
an Archive & Install we reinstall a new system and import all you files, apps, settings (wireless, printers etc) if you select the "Preserve user and network settings" option.
some apps may not fuction properly like Adobe CS3 and Parallels off the top of my head as they install hidden files and files in the system folder. you may have to install those again.
here is an article about the Archive & Install feature from Apple.