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It does based on the criteria you provide it. If you want to filter based on type (Lead or Contact), use the "SFDC Type" filter. Otherwise, if you have a list of just those who are in California and no other filters, the list will consist of Leads and Contacts.
Yeah Marketo refers to EVERYONE (Salesforce 'lead' and 'contact') as simply 'LEADS'. So unless you specify as Jeff said, you're getting everyone.