Over a month ago, we were briefed about a secret Microsoft technology that we were told would be announced alongside the Windows 7 Release Candidate (RC) and would ship in final form simultaneously with the final version of Windows 7. This technology, dubbed Windows XP Mode (XPM, formerly Virtual Windows XP or Virtual XP, VXP), dramatically changes the compatibility story for Windows 7 and, we believe, has serious implications for Windows development going forward. Here's what's happening.

XPM is built on the next generation Microsoft Virtual PC 7 product line, which requires processor-based virtualization support (Intel and AMD) to be present and enabled on the underlying PC, much like Hyper-V, Microsoft's server-side virtualization platform. However, XPM is not Hyper-V for the client. It is instead a host-based virtualization solution like Virtual PC; the hardware assistance requirement suggests this will be the logical conclusion of this product line from a technological standpoint. That is, we fully expect future client versions of Windows to include a Hyper-V-based hypervisor.

Continued @ Paul Thurrott Super Site
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Windows XP Mode for Windows 7 Screens

Screen shots @ Paul Thurrott