This feature, available in Windows 7 Professional, Ultimate, and Enterprise, provides a licensed copy of Windows XP with Service Pack 3 in Virtual Hard Drive (VHD) format. When installed with the proper integration components, it allows you to run Windows XP in its own virtual machine, separate from the host Windows 7 installation. You can attach USB devices to the virtual Windows XP machine, play sounds, and access drives on the host PC. You can access the Internet, but connections from the Windows XP virtual machine to the local area network are disabled by default.
http://blogs.zdnet.com/Bott/?p=1461