Windows XP Mode includes a pre-packaged virtual Windows XP environment and Windows Virtual PC to run the virtual Windows XP environment. Applications installed in Windows XP Mode are automatically available on the Windows 7 Start Menu or Task Bar and can be launched just like any Windows 7 program. Further Windows XP Mode is pre-configured with the Windows XP firewall and to apply updates automatically from Windows Update.
You may find that Windows XP Mode is a bit similar to the seamless integration in MED-V by making applications installed in the Virtual PC of a MED-V workspace available in the All Programs menu of the hosting OS as shown in my Screencast: Mad About MED-V Part 2 of 4, User Experience. Still notice Windows XP Mode is developed with small business in mind and in a standalone setting. While MED-V is part of Microsoft Desktop Optimization Pack (MDOP) available to only Software Assurance (or SA) customers at this time and offers an enterprise virtual machines lifecycle management capability. In essence, Windows XP Mode does not replace MED-V.
Either Windows XP Mode or MED-V, since a hosting OS will need to run a session of Virtual PC the resource requirements for RAM and disk space are higher. When it comes to virtualization, 2GB of memory in current PC computing environment should be considered as an entry point. Additionally, Windows Virtual PC requires a PC with Intel-VT or AMD-V enabled in the CPU, as it takes advantage of the latest advancements in hardware virtualization.
Here are two selected readings:
and also Windows 7 RC is now available from TechNet/MSDN subscription sites.