This is a string array variable representing the arguments given to the command that triggered the currently-executing MUDL function. %s is only set in ON_XXX MUDL functions, that is, functions that intercept commands. MUDL will not compile other types of code with %s's in them.
If a MUDL function was attached to on_say (it intercepted the 'say' command) then if someone issued the command
say hi there%s[1] would be 'hi' and %s[2] would be 'there'.