Windows Live OneCare Team blogs about the relationship of their products, OneCare (now in RTM) and Windows Defender (free antispyware):
if Windows Defender is installed on a machine and then OneCare v1.5 is installed afterward, by default the installation will disable Windows Defender. Windows Defender will then display a dialog indicating that it has been disabled, and asking if the user wants to turn it on again. When you are installing OneCare v1.5 you should close this dialog without re-enabling Defender. OneCare intentionally disables Defender because it can cause system instability to have both running at the same time, and since OneCare is a superset of Defender, there is no reason you would need both of them running.
A number of folks have also asked why OneCare disables Windows Defender rather than simply removing it. Two reasons: First, Windows Defender is part of the Windows Vista operating system and cannot be uninstalled, it can only be disabled. Second, if for any reason a user uninstalls OneCare, we will automatically turn Windows Defender back on to help keep users protected against spyware.
There is one last issue which some of you may have experienced. If Windows Defender was installed on your machine and now appears to be “missing,” it may be due to the fact that the final Beta version of Windows Defender recently expired, on December 31, 2006. If you installed OneCare v1.5 (the beta) on a Windows XP machine with Windows Defender Beta 2 previously installed, OneCare automatically disabled the Beta version of Defender. If you try and install the latest version of Windows Defender, you will see a dialog indicating that you do not need to install both products, “OneCare has been found…”