I re-read the MSDN article as to why I thought it's physical order of arrangement.
MSDN: http://msdn.microsoft.com/en-us/library/aa933131(SQL.80).aspx
Because the clustered index dictates the physical storage order of the data in the table
And the option was:
Rows in a table are PHYSICALLY stored in the clustered index order
I am not sure I quite understand the difference.
A good learn about the XML index, didn't know that.