As I've mentioned in several previous posts, an App-V-based solution could be made entirely invisible to the user. Simply intercept a legacy Setup program at startup and redirect it to an automated version of the App-V Sequencer. The end product would look and work just like any locally installed application, right down to local shell integration and drag-and-drop functionality. Contrast this with the proposed "XP mode" solution where you have to interact with an entirely different operating environment (you install virtualized applications from within the Windows XP VM), not to mention managing multiple file systems, program directories, and registry hives.
Perhaps Microsoft just got lazy. Perhaps it was looking for a quick fix, and stuffing a copy of XP into a VM seemed like the path of least resistance. To the uninitiated, it probably seems like a great idea. However, to those of us who know better and have extensive experience with the full range of virtualization and legacy integration options, an XP mode seems like a cop-out. It's another "good enough" solution from a company that stopped shooting for technical excellence long ago.