It is most used programs. XP stores the information in a file on your HDD. Basically it keeps track of how many times you click the shortcut in your start menu and adds it to the list once it surpasses the last one in the list.
Sorry, typo (edited). I meant most frequently used. I use Grokster as much or more than WinMX, but Grokster never appears in the list, but WinMX is there. Also I can run a program that I've never run before (can't remember and I'm not at home to see what it was), and it appears in the list.