Microsoft finally discussed “Windows XP Mode” in depth in a full QnA press release entitled “Helping Small Businesses With Windows 7 Professional and
Windows XP Mode”, featuring Scott Woodgate, director of Desktop Virtualization and Microsoft Desktop Optimization Pack (MDOP). Below is the entire QnA session which outlines the fundamentals of this new feature:

PressPass: What are you announcing today?

Woodgate: We are announcing the beta release of
Windows XP Mode for Windows 7. Small businesses told us they wanted help upgrading to Windows 7.
Windows XP Mode, an optional feature of Windows 7 Professional, Enterprise and Ultimate editions, helps small businesses upgrade to Windows 7 by providing a virtual
Windows XP environment capable of running many Windows XP-compatible business and productivity applications. Customers can run many older
Windows XP business and productivity applications within
Windows XP Mode and launch them from the Windows 7 desktop with just a single click. A beta of
Windows XP Mode will be made available on April 30.

PressPass: How does
Windows XP Mode work?

Woodgate:
Windows XP Mode is the combination of two features. The first part is a pre-packaged virtual
Windows XP environment. The second is Windows Virtual PC, which is used to run the virtual
Windows XP environment. Customers can install their applications into
Windows XP Mode using typical installation processes such as downloading from the Web or using the product CD. Once installed, the applications are automatically available on the Windows 7 Start Menu and can be launched just like any Windows 7 program. Optionally, these
Windows XP applications can be pinned to the Windows 7 Task Bar and launched using just a single click from the Windows 7 desktop.
more @ http://www.neowin.net/news/main/09/04/29/microsoft-discusses-windows-7s-xp-mode-in-depth