I recently did an "Archive and Install" and it did indeed leave the computer just as I had left it, except with the new OS (or in my case an older version). It also creates A folder named "Previous System" on the HD that I believe contains all the library items and system prefs that were placed there by third party application as well as copies of all the old applications. I found that needed very little from this folder and ended up trashing it to regain some 2.5 GBs or so of hardrive space.
Archive and Install keeps all home directories completely intact. It replaces the system folder, and a couple of others, but instead of deleting these, it keeps them in a folder for you to keep what you want.