When the integration features are enabled we are actually using Remote Desktop to connect to the operating system running inside the virtual machine.  This allows us to take advantages of many of the technologies built into remote desktop: The ability to display seamless Windows from the virtual machine The ability to redirect smart cards and printers to the virtual machine The ability to share folders to the virtual machine

We have worked hard to do this while maintaining a level of performance similar to that of Virtual PC 2007, and in many cases the performance is better.

However there are still times when you might need to disable integration features.  The most common is if you are running a program that needs to use DirectX or needs to change the resolution of the display – as neither of these are possible to do when using remote desktop.

Note that if you disable integration features you lose access to shared resources (smart cards, printers, folders, etc…).

Source: http://blogs.msdn.com/virtual_pc_guy/archive/2009/06/17/what-is-integrated-mode-in-windows-virtual-pc.aspx