Even though this is true, this will not work with Windows 7 Home version. You will need Windows 7 Professional or Ultimate for this to work. The computer used in this demonstration is a Gateway that does support Hardware Virtualization, but for the sake of this demonstration, the new version was installed. This article will clearly detail the procedure to install XP mode in Windows 7. The PC used in this demonstration uses Windows 7 64-bit version.
The first step is to go to the Microsoft XP Mode website. There are three downloads that you will need to install. The third actually does not have to be installed if you are using SP1. The three downloads are Windows XP Mode, Windows Virtual PC and the Windows XP Mode Update. The links are found here:

http://www.microsoft.com/windows/virtual-pc/download.aspx
Click on this link and this page will open. Only part of the screen is shown:

You do not have to e-mail the instructions, but you may want to print them. The instructions are given in this article. Click on Step 2, Windows XP Mode and run the download. It will take a few minutes to complete. Double-click on the downloaded file and you will be prompted to run the program. Click Run. The setup will begin. Click Next to continue. The installation will commence.

It takes awhile, so be patient. Next, you will have to agree to the licensing terms by clicking “I Accept”.

The updates will be installed. It is possible that the update will not install and you will be shown a message to that effect. If this is the case, attempt the above steps a second time and it will probably work. After the installation is complete, you will have to restart your computer.

Once your computer restarts, the updates will be configured. Now go to Step 3, Windows Virtual PC. Start the download and again be patient. It takes about 8 minutes to complete. You will be prompted again for the License Agreement. Click Next to accept and start the installation.

Create your user credentials password. If you are the Administrator, use your Administrator password. Turn on Automatic Updates for XP in the Setup window. The setup will share drives on the computer with XP Mode. This makes file sharing easy. If you wish to modify this, click “How do I change drive sharing options?” Instructions are given. The following series of windows will present as the XP Windows Virtual PC is formatted:

Once this is complete, you can find the XP Mode in the Start menu. Select All Programs and scroll to Windows Virtual PC. Click on that and you will see Windows XP Mode. Now, click on that. You will see that it is loading settings. There you have it! A fully functional XP mode in Windows 7 is now available as needed. This is great to have if you need to use files or applications that are incompatible with Windows 7 but compatible with XP, which happens frequently for many users.

The feature is called Virtual XP Mode, or XPM, and is available in Windows 7 Professional, Ultimate and Enterprise. It requires one additional download but is completely free in those Windows 7 editions. It basically allows users to run a virtual Windows XP client on the computer system so that compatibility talks should be a thing of the past. The Windows XP applications can be displayed on the same desktop as their Windows 7 counterparts making it a one desktop solution.

The major benefit for companies is that they can now run their proprietary programs that are compatible to Windows XP on Windows 7 as well without the fear of another Windows Vista disaster which turned out not to be as compatible as advertised. The following screenshot shows two Word clients running under Windows 7. Word 2003 in Virtual XP Mode and Word 2007 in Windows 7 natively.

Paul Thurrott who broke the news about the benefits:

• Users can run Windows XP-based applications (like IE 6) alongside Windows 7 applications under a single desktop.
• Microsoft can claim almost complete Windows XP compatibility, or almost 100 percent compatibility with all currently running Windows applications.

That’s a pretty interesting feature for many companies that have not made up their minds yet about Windows 7. It should give them a positive boost in the pro-Windows 7 direction.