Some facts about Windows XP System Restore
The System Restore function in Windows XP is one defense line against file corruption or loss but it is far from a complete backup. Many PC users are confused about what System Restore actually does. When you create a restore point, what is actually being saved? One place to go to get information about which files and folders are saved is this reference. One folder that is not monitored by System Restore is My Documents. So if you use My Documents for your personal files, you will need another way to keep them backed up. Also not backed up are your Internet cookies and favorites and many other types of files created by the user. A Microsoft FAQ on System Restore says
System Restore monitors only a core set of specified system and application file types (e.g. .exe, .dll etc), while Backup Utility typically backs up all files including users personal data files, ensuring a safe copy stored either on the local disk or to another medium. System Restore does not monitor changes to or recover users’ personal data files such as documents, graphics, e-mail, and so on.