That's right - in Windows 7 Professional and Ultimate, Microsoft is providing a free Windows XP virtual machine to help ease the fears of business clients who have older programs that run great on XP but probably won't on Windows 7.
If you didn't already know, a virtual machine is a piece of software that pretends to be a full hardware computer and executes the programs that run in it as if that was the case.
So with "XP Mode" in Windows 7, Windows XP thinks its running on a dedicated computer when in reality, that computer is really just a clever piece of software in Windows 7.
A bit confusing, I know, but it's very cool and the fact that a full copy of Windows XP is included as a virtual machine in Windows 7 is a smart move.
You can read more in an article at the About.com Computing Center by Michael Scalisi: