Windows 7 doesn’t come with Windows XP Mode, but you can download it for free from here. Essentially, Windows XP Mode is virtual machine software (called Virtual PC) that can emulate a whole other computer even running a completely different operating system than what your computer booted up to. AND, it can run this other operating system AT THE SAME TIME as your primary (called “host”) operating system. Windows XP mode is Virtual PC running a Windows XP virtual machine.
Here’s a video demonstrating how it works:
[youtube=http://www.youtube.com/watch?v=eNFczLYBtrA]
The purpose of this product is to allow you to go ahead and make the switch to Windows 7, but without losing compatibility with older software that may only work on Windows XP.