In package.xml 1.0, the contents tag was <filelist>. The purpose of the tag changed dramatically in package.xml 2.0, warranting a name change. Now, <filelist> can be found in the release section of the package.xml.
<contents> is used to describe the contents of a tarball. Nothing further. All files in the contents tag will be placed into the tarball regardless of whether they eventually get installed by the PEAR installer. This fact can be used to create a very versatile tarball, one that can be directly unzipped and work out of the box as well as be installed by the PEAR installer and work out of the box.
For most release types, contents contains a single <dir> tag that then either contains nested dir tags and/or <file> tags.