Put it simply: any hardware that doesn't have drivers for Vista or 7, still will not run in "XP Mode" on Windows 7. The "XP Mode" is a virtual machine, a whole "virtual computer" that tricks Windows XP into thinking it runs on physical hardware. It can only access devices that have Windows 7 drivers. So the "XP Mode" is primarily for software that doesn't like running on Windows Vista or 7, and insists on running on Windows XP.
That's not to say XP Mode isn't cool: it is. It's been there in various incarnations for quite some time, and on Windows 7, it adds a few perks that make it even better:
- Access to USB devices, such as flash drives.
- Direct access to Windows 7 hard drives.
- Access "XP Mode" applications directly from Windows 7 desktop.
If you have applications that require Windows XP, such as Intuit QuickBooks 2003, Windows 7' XP Mode is for you.
See TechRepublic's video on the subject: