System Restore is a feature first introduced in Windows XP. It allows users to restore their computers to a previous state without losing personal data files. System Restore automatically creates restore points, which you can use to revert your system to the way it was at a previous time. Restore points are created both at the time of significant system events (such as when you install applications or drivers) and periodically (each day). You can also create and name restore points at any time.
System Restore is a feature also included in Windows Vista, but allows recovery from a greater range of changes than in Windows XP. In Vista when a restore point is requested, a shadow copy of a file or folder is created, where a shadow copy is essentially a previous version of the file or folder at a specific point. Windows Vista can request restore points automatically, or do so when you ask. [Adapted from Microsoft Windows Vista]