1) What are "XML"gauges?
There two basic types of gauge used in MSFS. The original GAU (.gau) format & the later XML gauges first introduced in FS2002.
2) What does XML stand for?
Extensible Markup Language. --->
http://en.wikipedia.org/wiki/XML3) What makes them so special?
They're easier to create than gauges in the old GAU format as no knowledge of programming is necessary. I believe they are also more adaptable
4) How do they work? What is their function or purpose?
They work in much the same way as any other FS gauge.
5) What do XML gauges look like on POSKY 777 VCs when Installed? Please post a picture.
They will look no different than any other gauge on the panel. A lot of the default gauges are in XML format.
6) Anything else that you can explain? Anything at all. Discuss compatibility issues, their effect on frame rates; anything.
There are two basic types of XML gauge. The default ones are compressed in CAB files. Look in the FSX\Gauges folder for examples. Many 3rd party XML gauges are contained in ordinary yellow folders.
This is a shot af a Panel folder from a Posky 777. Note the two sub-folders named Pky_util & Posky777. There is also a file named B737_800.cab. All three are XML gauges.

If you open them you will see they contain a number of XML & BMP files. These make up the individual gauges. They must remain as they are to be recognised by FS. Most XML gauges should be fully compatible with FSX.