This is also referred to as the auto complete list. This list contains contacts whom you’ve emailed, yet not added their name to your contact list. The location of this file varies depending on your OS, but can typically be found here:
drive:\Documents and Settings\<user>\Application Data\Microsoft\Outlook
or for Windows 7:
C:\Users\Username\AppData\Roaming\Microsoft\Outlook --The AppData folder is hidden, so you'll have to show hidden folders to see it.
This feature changes completely in Office 2010. More on that here.