Do you want to move to Windows 7 but worried about that XP application that will require some changes?
Introducing XP Mode for Windows 7
What XPM actually does is allow you to run Windows 7 and XP side by side so applications that don’t run on 7 can be run on XP. The main difference is that the user will never see the XP machine, just the applications running on it which appear as if installed locally on Windows 7. It is targeted at removing the deployment blocker of apps that won’t run on Windows 7.
If you want to know more I would suggest first reading the SuperSite for Windows showing off Windows XP Mode and what it’s like to run Windows XP and Windows 7 applications side-by-side
extracts from the SuperSite mailing
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.
XP Mode consists of the Virtual PC-based virtual environment and a fully licensed copy of Windows XP with Service Pack 3 (SP3).
It will be made available, for free, to users of Windows 7 Professional, Enterprise, and Ultimate editions via a download from the Microsoft web site. (That is, it will not be included in the box with Windows 7, but is considered an out-of-band update, like Windows Live Essentials.) XPM works much like today’s Virtual PC products, but with one important exception: As with the enterprise-based MED-V (Microsoft Enterprise Desktop Virtualization) product, XPM does not require you to run the virtual environment as a separate Windows desktop. Instead, as you install applications inside the virtual XP environment, they are published to the host (Windows 7) OS as well. (With shortcuts placed in the Start Menu.) That way, users can run Windows XP-based applications (like IE 6) alongside Windows 7 applications under a single desktop.
Obviously, XPM has huge ramifications for Windows going forward. By removing the onus of legacy application compatibility from the OS, Microsoft can strip away deadwood technology from future versions of Windows at a speedier clip, because customers who need to run older applications can simply do so with XPM. For Windows 7 specifically, XPM is a huge convenience, especially for Microsoft’s corporate customers, who can of course control XPM behavior via standard Microsoft administration and management technologies like Active Directory (AD) and Group Policy (GP). And it significantly recasts the Windows 7 compatibility picture.
Basically this will enable on Windows 7 Windows XP applications at almost 100 percent compatibility.