It's still inside a VM, but you can start it in a mode where all you see is the application window, not the XP desktop. You can run a full XP desktop as well, though, and the application you're running has to be installed through the XP VM, not through windows... at least, that's how I interpreted the article I read. I couldn't get Virtual XP mode running on my windows 7 RC install, which, is itself running inside a virtual box client, heh.
I keep going back and forth over whether I should buy it at all (vs Vista Ultimate)- it annoys me that I can't apply the pre-order deal to Ultimate- and I'm not forking over the $$ for the full price of ultimate upgrade, and to install the pro or home premium versions, I'd have to do a clean install of windows- and Vista is set up pretty well for me atm. If I do buy it, I'll buy pro, though, mostly because of virtual XP and the 16 gig limit on home premium.