This setting controls the size of the file system cache. When set to Programs (Default) a standard sized file system cache is allocated (Less than 10MB RAM); this is recommended as it provides best Application performance. When set to System cache this enables the use of a large file system cache (Up to RAM minus 4MB!); this option is only suitable when Windows XP is acting as a Server not as a gaming system or for other Application/Workstation use as it will be detrimental to performance as Microsoft notes:
When you enable System cache mode on a computer that uses Unified Memory Architecture-based video hardware or AGP, you may experience a severe and random decrease in performance. The Drivers for these components consume a large part of the remaining application memory when they are initialized during startup.