"XP Mode couldn't be simpler. It consists of Windows Virtual PC 7.0, a new version of Microsoft's client-based virtualization product line, and a fully licensed install of Windows XP with Service Pack 3 (SP3). (You can also install other OSes into the Windows Virtual PC 7.0 environment if you'd like.) As with today's versions of Virtual PC, you're free to load up the XP desktop in a window and run applications inside of the virtual environment. But XP Mode goes a step further by using MED-V technologies to allow installed applications inside of the virtualized XP to appear in the host OS, alongside native Windows 7 applications."
In other words, it is a virtualization utility, catching up with third party tools such as VMWare Fusion when it comes to integration into the host OS. On my MacBook I can already launch XP applications alongside OSX applications, they appear each in their own window, appear in the dock etc.
As I said before, the details are what could make this better than third party virtualization solutions: in particualr the treatment of virtualized registry, filesystem and user rights. But we're not given details on them.
Exactly like we're not given details on hardware accelerated 3d graphics (VMWare Fusion supports that), so we don't know if this is viable for games.