As its name implies, the version of a System install archives various settings and files before replacing the actual system.
Anything in your Home folder, this includes the desktop but why not put the files inside the Home folder, is saved and put back where it was before the install.
All the iLife suite stuff, photo's, music, movies and the like are all preserved.
Any applications that you installed, other than those that came with OS X, are left intact in the Applications folder.
Network settings, email, Bookmarks, are all saved and reapplied on completion.
Boot from the installation/restore DVD, whichever is the newer, and step S L O W L Y through the initial steps. You should be presented with a warning about not being able to install unless you change your installation options. Change the option to Archive and Install. (Do NOT proceed unless you have done this) Loss of ALL data can result from a FORMAT and Install.
On completion, you will reboot and then try the DVD player. The system will need updating via the Software Updater to bring it up to the current version of your OS.
BTW, the Windows version of VLC will not run on a Mac. I have it on my machine, as do many others, for those video files that QuickTime cannot play.
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