It means that “legacy” applications which need the various compatibility hacks and work-arounds that Windows has been carrying around for some time will run under this WinXP “guest” environment alongside Windows 7. Windows 7 will not support all applications that might have run under XP.
On the whole, this is good news for Windows - it means that Microsoft is finally breaking away from the past legacy application hacks in Windows 7, so they’ll be able to tighten up the speed, security and reliability of the new OS.
Now, if they’d only stop these gratuitous, sweeping changes to their UI...
I don’t find the UI changes in 7 gratuitous but rather beneficial when used correctly.