This is a reply to @gcluley, who linked to this ZDNet story (which in turn took its quotes from Sophos Podcasts).
The second most crazy thing about the entire "XP mode" issue in Windows 7 is that the feature is entirely unnecessary. Corporate customers of Windows are already, for the most part, comfortable with managing virtual Windows desktops through third-party products with much better management options or at least have trialled such products. Home users of Windows just take whichever version is pre-installed when they buy the PC and if it means buying new versions of some apps, that's what they do. They're used to it. The group of people who could benefit from XP mode - people with a strong need for app compatibility with XP but with no experience of virtualisation - just doesn't exist.
The very existence of the XP mode feature is a microcosmic example of the way Ballmer has been running Microsoft - if there's a market out there that MS isn't in, MS needs to be in it pronto. Bing, Morro, Web-Office, Zune and now virtualisation are all testament to the inability of Microsoft to concentrate on what it does. What Microsoft really does is to sell two things; an enterprise computing environment and an OEM software distribution. Forget that Windows and Office are accounted as two separate products; MS sell Windows+Office to businesses and Windows to computer makers.
Now the interesting question to ponder is which of Microsoft's (real or perceived; remember they aren't necessarily in this market) competitors the "XP mode" feature is a response to. My interpretation is that it's not actually VMware and its ilk at all - Microsoft is once again responding to nonexistent competition from Apple. Boot Camp and the third-party desktop virtualisation offerings on the Mac (including, without hint of irony, VMware) let users use OS X as their shiny new OS with an "XP mode" of sorts for legacy applications. I think what Microsoft are trying to do here is to show that Windows can be the new shiny with XP as the legacy mode, and are therefore positioning XP mode as a counter to the fictitious competition from Apple. Oh, and if you don't believe me when I say that the competition from Apple doesn't exist - Apple sell all of the premium computers while Microsoft take the aforementioned corporate and OEM markets.
OK, so if that was the second most crazy thing about XP mode, what is the most crazy thing about XP mode? It's also that the feature shouldn't exist. Windows has always had a problem with segregating distinct services which other operating systems don't suffer from. While Microsoft's avoidance of this issue has allowed a whole new software industry to spring up around it, the fact that they need to start a second copy of Windows just to get some applications running in Windows 7 doesn't give me much hope for the future.