XP Mode consists of the Virtual PC-based virtual environment and a fully licensed copy of Windows XP with Service Pack 3 (SP3). It will be made available, for free, to users of Windows 7 Professional, Enterprise, and Ultimate editions via a download from the Microsoft web site. (That is, it will not be included in the box with Windows 7, but is considered an out-of-band update, like Windows Live Essentials.)
XPM works much like today's Virtual PC products, but with one important exception: As with the enterprise-based MED-V (Microsoft Enterprise Desktop Virtualization) product, XPM does not require you to run the virtual environment as a separate Windows desktop. Instead, as you install applications inside the virtual XP environment, they are published to the host (Windows 7) OS as well. (With shortcuts placed in the Start Menu.)
For Windows 7 specifically, XPM is a huge convenience, especially for Microsoft's corporate customers, who can of course control XPM behavior via standard Microsoft administration and management technologies like Active Directory (AD) and Group Policy (GP).
TidBITS : http://db.tidbits.com/article/10241
Paul Thurrott's WinSuperSite : http://community.winsupersite.com/blogs/paul/archive/2009/04/24/secret-no-more-revealing-virtual-windows-xp-for-windows-7.aspx