XP Mode is VirtualPC and a licensed Windows XP VHD. You don't even have to use or see the XP desktop if you run apps on it in Virtual App mode (basically an RDP session).
We use it here for an ancient app or two. Works fine.
PS: Apps run in virtual mode use the title bar and window trim of XP and not Windows 7, If you set the Virtual XP to classic theme you'll get classic title bars for Virtual Apps.