The Virtual XP will be available as an additional download for Windows 7, i.e gonna cost you. It will actually run XP (or any other version of Windows such as 98) in a virtual machine in Windows 7 on the computers hardware. So it's not like running a virtual machine today where you have a whole nother OS running on the system. It's aimed at the corporate market that will likely be using legacy software but is available to the end user as well. This will allow a lot of the legacy code that makes Windows bloated and crash prone to be removed streamlining Windows.
I'm rehashing info from Windows Weekly Episode 103 or 104.