"In order to make the personalization process simple, Google Desktop will analyze the way you interact with your computer before recommending a gadget. For example, Google Desktop can often predict your local weather, favorite stocks, frequently viewed news and variety sites, and more. The program will base its suggestions on the prior web sites you have visited, the Sidebar gadgets you use most, your preferred news sources, and the applications you run."
When you install Google Desktop for the first time, the software most likely looks at your browser's history and the programs you use. But the recommendations will improve after Google Desktop runs for awhile. There is also a section of recommended Google Desktop gadgets (in Add/remove gadgets), that uses the same information described above.
Related:
10 great uses for Google Desktop
Google Recommendations
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