A recent article “Windows 7's XP Mode: what it is, how it works, who it's for” by Peter Bright published at Ars Technica is one of the best that I’ve seen on the topic. It explains what Windows XP Mode is in great details, including setup screens, how it compares to other virtualization technologies such as MED-V, and who is likely to benefit most from the XP Mode option.
Below are two excerpts from the article.
“Windows XP Mode is a downloadable add-on for Windows 7 Professional, Ultimate, and Enterprise. It has two parts: the virtualization software itself, and a disk image containing a pre-installed, activated, licensed copy of Windows XP Professional with Service Pack 3 preinstalled, complete with the glorious Internet Explorer 6.”
“In a break from the past, the new version requires hardware virtualization support—Intel's VT or AMD's AMD-V.”