Since this is now public :)
http://www.withinwindows.com/2009/04/24/secret-no-more-revealing-windows-xp-mode-for-windows-7/
Over a month ago, we were briefed about a secret Microsoft technology that we were told would be announced alongside the Windows 7 Release Candidate (RC) and would ship in final form simultaneously with the final version of Windows 7. This technology, dubbed Windows XP Mode (XPM, formerly Virtual Windows XP or Virtual XP, VXP), dramatically changes the compatibility story for Windows 7 and, we believe, has serious implications for Windows development going forward. Here’s what’s happening.
XPM is built on the next generation Microsoft Virtual PC 7 product line, which requires processor-based virtualization support (Intel and AMD) to be present and enabled on the underlying PC, much like Hyper-V, Microsoft’s server-side virtualization platform. However, XPM is not Hyper-V for the client. It is instead a host-based virtualization solution like Virtual PC; the hardware assistance requirement suggests this will be the logical conclusion of this product line from a technological standpoint. That is, we fully expect future client versions of Windows to include a Hyper-V-based hypervisor
Did you catch this gem?
Windows 7 will grab the GPU to run the desktop, and it can't share the device. If it were even possible, you could possibly assign the GPU to XPM, but that would mean you'd lose GPU acceleration for the desktop, CPU use would spike, and things would start to resemble molasses in the winter very quickly. This much brain twisting logic is unlikely to be implemented even if it could somehow technically work. Basically, the host OS, Windows 7, can and must own the GPU fully.
What does this mean? It means XPM will only 'see' a generic 2D video card, and if you are really lucky, it will see some basic 3D features. Want games to run? Nope. Want hardware accelerated sound? Nope. TCP/IP acceleration? Nope. Anything cool? Nope. You will be stuck with the virtual equivalent of a Best Buy special from 5 years ago, a PC that looks up to the blistering graphics power of an Intel 965 chipset.
Let's just say that "The Inquirer" makes a very good case that XPM is far from what MSFT is promising.