XPM stands for XP-Mode and it refers to a Windows XP virtualization feature of the Windows 7 operating system. Specifically Windows XPM will function on Windows 7 Professional Edition or Windows 7 Ultimate. Windows Virtual PC requires a CPU with the Intel Virtualization Technology or AMD-V feature turned on. This feature must be enabled in the system BIOS. XPM consists of the Virtual PC-based virtual environment and a fully licensed copy of Windows XP with Service Pack 3 integrated.
It is not included with the Windows 7 operating system out-of-the-box, but can be downloaded for free from the Microsoft web site. XPM does not require you to run the virtual environment as a separate Windows desktop. With XPM, as you install applications within the XPM environment, they are published to the Windows 7 operating system as well, making it possible for you to run XP-only software, incompatible with Windows 7, from the Windows 7 desktop.
XPM was included as an option for Windows 7 as a incentive for businesses to make the upgrade to Windows 7. Some businesses have been reluctant to upgrade to the new operating system after the Windows Vista issues. Some would much rather stay working with Windows XP instead. This new feature will allow businesses to have the best of Windows 7 and the best of Windows XP too, reducing the overall risk significantly.
As an optional component, Microsoft has also made it possible to strip away older technology from its newer operating systems, and simply provide support when needed with virtualization instead of retaining older components on each new OS. It also now allows Microsoft to claim that Windows 7, with XPM, is close to 100 percent compatible with software made for the Windows XP operating system, instead of saying it is as compatible as Windows Vista was.