Does Microsoft Security Essentials replace Windows Defender?

"Yes. Windows Defender protects against adware and spyware, while MSE does all that and more (protection from viruses, rootkits, etc).

MSE will actually disable Windows Defender to manage your PC's realtime protection. Also, from the Security Essentials Wikipedia page:

Microsoft Security Essentials (MSE)
(Previously codenamed Morro) is a free
antivirus software created by
Microsoft that provides protection
against viruses, spyware, rootkits,
and trojans for Windows XP, Vista, and
7.

MSE replaces Windows Live OneCare — a
subscription antivirus service — and
Windows Defender, which only protects
users from adware and spyware."