Q: How is this different from Windows Defender?
A: Windows Defender detects and removes known spyware only. It is not designed to protect against the full breadth of malicious software, and specifically does not prevent viruses, worms, Trojans, and other malicious software from infecting your machine. The new no-cost solution will be a comprehensive anti-malware solution.
Q: Is Microsoft Security Essentials designed to replace Windows Defender?
A: No but if you are running Microsoft Security Essentials, you do not need to run Windows Defender. Microsoft Security Essentials is designed to disable Windows Defender in order to manage the PC’s real-time protection, including anti-virus, rootkits, Trojans and spyware.
(note that the following two statements are from the early beta - a revision is expected soon)
Q: Does installing Microsoft Security Essentials disable Windows Defender
A: Currently Microsoft Security Essentials does not disable Windows Defender, but it should and will in a later version of the beta.
[edit - sboots: MSE should disable Defender on install to Vista and Windows 7 and remove it from XP]
Q: Do I need to manually disable Windows Defender in the meantime?
A: No, you can safely leave both applications enabled.
[edit - sboots: If MSE did not disable or remove Defender on install, performance of your system may be impacted. You should disable the real time protection of Defender in Defender's settings]
If you find that my answer was what you were looking for, please remember to click the "mark as answered" box below! Thanks, Kevin