All Files in the archive are going to be extracted.

When this option is chosen the wordpress core files, if any, are not modified. They are not deleted and/or extracted.

When this option is chosen the wordpress core files, if any, are not modified. They are not deleted and/or extracted.
Also, if a plugin (theme) exists on BOTH the host and and the archive, the contents of the host plugin (theme) are going to be kept.

When this option is chosen only the "uploads" folder and plugins (themes) that don't exist on the host are going to be extracted.