what he did was to install Win 7 RC on the same box he runs his XP. he then did some performance measurements on a few programs in XP, rebooted to the Win 7 activated the XP Mode and ran the same programs, getting a poorer performance for them, and some wouldn't run. Out of interest I had him go find a Third Party Virtual Machine program that would run in Win 7 and do the test in that, and he got a better performance than the MS Win 7 XP Mode. This then lead to a change of hard drives (using another drive of the same brand, model, and size) and the running of the same programs in WINE on SimplyMepis Linux; with the results noted in the earlier post
Why the differences between the Win 7 XP mode and the third party Virtual Machine, I don't know; but I do suspect it's a matter of the quality of the code in the virtualisation process or MS don't do it as a full virtual machine.
The whole issue comes back to the deliberate changes MS makes to have the various versions incompatible. If MS kept all the OS command sets the same between versions of Windows, then any hardware or software that ran on one version would run perfectly on the next - as happened between Win 2000, Win XP, and Win Server 2003, but they change them so that will not happen, and thus they can sell more copies of their new versions of applications and charge to sell people the new code needed to make the hardware and software compatible, as well as charge to certify and digitally sign drivers.
All MS need to do to create a virtual machine inside one version of Windows is just have a set up where it takes the commands from the the application made for the older version and translates them into the commands used in the newer version - which is basically what a virtual machine does. However, in most virtual machine software they have to totally recreate the full operating environment of the OS being run, where MS need only do that for only a portion of it. If MS take the partial approach, a likely case as it would be quicker ans easier for them, then it's possible they may have missed or left out something they see as minor.