Performance inside XP Mode is going to be a bit slower than it would be from the host OS - Windows 7 - so XP Mode should only be a last-case option for software that will not work directly in Windows 7. Still, it is a nice feature for those situations... and I've seen folks come up with other inventive uses for it (like doing all of your internet surfing from within XP Mode, to avoid the risk of viruses infecting the host OS).
Windows XP mode is essentially a version of Virtual PC with XP Pro preconfigured. It does the trick pretty well, and includes some built in preconfiguration to make it easier to share files and devices between Windows 7 and the Windows XP machine. Keep in mind, though, that not all devices will work perfectly between the two. Most USB devices should work fine, but serial and parallel devices won't typically cross over. In addition, while it is easier to use than manually configuring Virtual PC, there's still a bit of a learning curve, especially if you need to do anything other than just run your software inside XP.
It's the best of both worlds: The new Windows XP Mode lets you run older Windows XP business software right on your Windows 7 desktop.
Designed primarily with small- and medium-sized businesses in mind, Windows XP Mode comes as a separate download and works only with Windows 7 Professional, Ultimate, and Enterprise. Windows XP Mode also requires virtualization software such as Windows Virtual PC. Both are available free on the Microsoft website.
Configure a custom computer with the Windows XP Mode.