instance.xml can be associated with a Feature, to provide initial list data.
The spec for the xml file can be found
On MSDN here and an example of a valid file can be seen below:
<?xml version="1.0" encoding="utf-8" ?>
<Elements xmlns="http://schemas.microsoft.com/sharepoint/">
<ListInstance
Id="WssAdminTasks" Title="$Resources:AdminTasks_Title;"
Description="$Resources:AdminTasks_Description;"
TemplateType="1200" Url="$Resources:AdminTasks_Url;">
<Data>
<Rows>
<Row>
<Field Name="Action">$Resources:AdminTasks_1_ActionUrl;, $Resources:AdminTasks_1_ActionTitle;</Field>
<Field Name="Description">$Resources:AdminTasks_1_Description;</Field>
<Field Name="Title">$Resources:AdminTasks_1_Title;</Field>
<Field Name="SystemTask">True</Field>
<Field Name="Priority">$Resources:AdminTasks_1_Priority;</Field>
<Field Name="Service">$Resources:AdminTasks_1_Service;</Field>
</Row>
</Rows>
</Data>
</ListInstance>
</Elements>However in a VseWSS project, the resources are all expanded in-line:
<?xml version="1.0" encoding="utf-8"?>
<Elements xmlns="http://schemas.microsoft.com/sharepoint/">
<ListInstance
FeatureId="fa344ed0-ad3e-4594-96b1-3c6b5c1749ba"
TemplateType="100"
Title="Queries"
Url="Lists/BusinessUnits">
<Data>
<Rows>
<Row>
<Field Name="Title">Business1</Field>
<Field Name="BusinessUnitCode">Code1</Field>
</Row>
<Row>
<Field Name="Title">Business2</Field>
<Field Name="BusinessUnitCode">Code2</Field>
</Row>
</Rows>
</Data>
</ListInstance>
</Elements>