Yup. Circles was also the name of social groups in Microsoft's threedegrees software.
If they wanted an RTM then they should have gone for a misspelling.
It's actually kind of confusing. Saying you 'circled' someone sounds odd, since it's not quite accurate. 'in your circle' vs 'in my circle' is kind of clunky compared to 'following me' or 'I follow'.
They don't offer anything related to groups of friends, though. It's a generic implementation of the usual 'following' set up.
Similar to when you first enable Priority Inbox. It asks you to mark a dozen or so of your emails as important or not important, then it guesses the rest of them based on that initial input. Then, if you don't agree, you can make some more corrections, and iterate until everything's generally satisfactory.
Obviously false positives and negatives have far greater potential consequences here than with priority inbox, but the same general ideas can be applied. Also the social graphs of the the people on your friends list is a very rich source of data for the learning algorithms. Once you've placed two or three people from work into the 'collegues' circle the connections between those two or three examples and the other people you know from work will make it pretty simple to guess the rest of the work circle.
EDIT: and assuming that circle will start off by importing your google mail contacts, it already has a fair amount of implicit data about your social graph when it comes to those people due to your email activity with them, and their email activity between each other.
Thinking about it, the priority inbox stuff could well prove to be a very rich soruce of data for them generally in this circle endeavour.
Gmail integration wouldn't hurt either.
(I just tried to show a link to the "private groups" feature on Facebook, and that proved to be very frustrating. It took me a while of thrashing around with Facebook's help feature--after first trying Google, ahem--to find the main page about Facebook groups
to show those of you who haven't tried them before. The private groups posting interface differs in some weird ways from the usual posting interface on wall posts and private messages, as typing "Enter" instantly posts the message, and the only way to form paragraphs in text is to type Shift-Enter, which is especially confusing for Mac users.)
It will be interesting to make the comparison between a new Google offering and Facebook. Any product or service that offers social interaction has to help each user build a network among the user's friends. Buzz was a big fail that way, as most of my friends immediately decided not to use it, but perhaps something new from Google will be more successful. My friends are all smart enough to know how to bail out of the second-best network if something better than Facebook comes along.