Yes, all code in the point of entry will be run and this will be the basis for the generated tests. All object creations and function/method calls will get traced and then test cases will get generated based on that. For dynamic test generation it's not so much about what code you physically have in a POE file, but what code is being run as triggered by the POE.
I don't remember exactly, but currently I think Pythoscope generates one test case for each function/method call it captures.
The idea of POE is not so much to contain code, but to provide... well, a point to enter into the app's code. You could put a single import and a call main() there and that would suffice. Interactive apps are easiest to test this way, because you can start it up and generate test cases by simply using the app.
Note that Pythoscope is not a finished tool, and while the principles I described are implemented, there are a lot of small details and corner cases that still need to be handled.
I hope that helps you undestand POE and Pythoscope.
Cheers,
mk