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As I see it:

  1. Microsoft has always provided backward compatibility for legacy applications;
  2. As far as the end user is concerned, things won't be behaving any different from what they normally expect.
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XP Mode and Virtual PC will be available for Windows 7Professional, Enterprise, and Ultimate as an optional download. winsupersite.com/win7/xp_mode_beta.asp –  stukelly Apr 30 '09 at 20:55
    
XP Mode probably will require hardware assistance from the CPU to virtualize XP –  setatakahashi May 7 '09 at 12:19
    
Setatakahashi is right - even some brand new processors won't support virtualisation, see theregister.co.uk/2009/05/07/intel_and_xp_mode for a rundown. –  Marko Carter May 8 '09 at 15:35
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9 Answers

Because instead of having to limit their opportunities in developing new features due to backward compatibility, they can now basically say screw it. By bundling a virtualized version of the previous OS, it won't impact things as much when they change interfaces, system APIs etcetera - basically enabling them to be more innovative.

Furthermore, it'll also ensure 100% compatibility, which is otherwise a major reason for enterprise clients not to upgrade OSs.

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Completely agree. The backward compatibility thing has crippled operating systems since forever. If you look at the times when this has not been the case then there have been gigantic leaps forward in technology and usability. It allows the developers to instead of saying "How can we improve this" to say "What is the best way to do this" and get off of a broken path. –  Xetius Apr 30 '09 at 8:34
    
Also agree with Mark, though I would like to add that this 'feature' is being semi-modeled from Apple's OS X introduction when they also allowed a virtual OS 9. It obviously worked for them for a while and did it for the same purpose of delivering 'full' compatibility with older software. –  l0c0b0x Jun 6 '09 at 3:23
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1) Yes, Microsoft has always provided backwards compatibility, but it comes at a massive cost, shipping a virtualised OS significantly reduces this cost.
2) Yes, that's the point of having the virtual OS running alongside the main OS - the user won't be able to tell the difference.

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Remember that Microsoft considers VM instances to be full installations of XP, and thus require their own license. So in addition to Mark S. Rasmussen's excellent answer, it's important because Windows 7 includes a complete license to a virtualized copy of XP.

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Excellent point Bob. In fact this is the KEY distinction. That's exactly the difference b/c VPC is free for anyone today. And it's easy to install. So we could ship a VPC image and VPC install but they'd need to buy a Win XP license. Of course, it's made much simpler by having all of this included (although VPC isn't in the current RC an may not ship with the first public release of W7. –  Clay Nichols May 7 '09 at 14:33
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  1. I absolutely agree.
  2. As I understand it, XPM does require some more modern processors and the extra RAM that we all understand is required for VMs. So there is going to be some friction for the business that really have to keep their legacy applications but also want to keep their current or older hardware.
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But, realistically, very few business are going to be in the position of upgrading OS without a hardware upgrade - if your hardware is that old, then it's going to be a forklift upgrade anyway. –  Richard Gadsden Apr 30 '09 at 9:47
    
Businesses are more coupled to their old versions of software than they are to their old dusty machines. Upgrading hardware typically can be way cheaper than a full fledged upgrade capital project. It is definitely the pay a little now approach but it also keeps them working with their current production systems. Why else would this product appear? –  MotoWilliams May 4 '09 at 5:02
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Virtual PC bundling is a big deal, but I think XP Mode will be bigger. Most people don't care about the fact that they're running in a VM, they just want their old programs to work.

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My problem with two instances of windows is security. Nowadays I have to secure both the host and the virtual instances and I don't think this will change with windows 7. The problem is that for a common user, it might be hard to understand the need to keep two antivirus running.

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i think we have all slightly misunderstood the whole xp virtual pc. it is more like the wine scenario in linux where the app accesses windows (xp) files as necessary but actually runs by itself without opening an xp session. sort of like the way calls to install to certain locations are now redirected to a users own app folder in vista and now in windows 7.

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can someone please clean this up and add some accuracy here? i kinda glossed over the main points –  jake Apr 30 '09 at 8:55
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Jeff Atwood (one of this site's creators) has some thoughts on it: http://www.codinghorror.com/blog/archives/001258.html.

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Some users know that Microsoft needed to change the Windows internals to improve Windows and that means to break compatibility with old Windows apps.

But most users just used Windows Vista and were shocked that their app was not working properly so it's a good news that it'll works as Windows XP.

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