Why do I need Windows XP mode in Windows 7?

"I had the same question. It became a really important feature for me as we're rolling out new computers with lots of RAM in them, and 32 bit just doesn't handle loads of RAM well. So then we had a problem with some applications and drivers not working on 64bit Vista (or '7). Online banking with smartcards was one application.

So the answer was to use Windows 7 RC Windows XP mode to allow Internet Explorer to 'bleed through' into the real OS, which works really nicely. This means IE appears as if it's on the local desktop (still one IE icon click) and it runs up the VM version of IE without any other interface clutter.

I'd grab the RC and take a look if I were you..."

"The XP mode is just a normal MS Virtual PC instance running a XP image. If you have a valid XP license there is nothing XP mode has to offer as you could just install Virtual PC make install XP yourself (or linux/unix).

Additionally to legacy application support it can also be used for old hardware without Vista/Win7 drivers (e.g. my current printer)."

You need it to make sure applications actually work on your new system. As always, there are poorly written applications whose developers didn't not bother to read docs, but instead just tested on XP. Well, one could easily blame Microsoft for this because they failed to release a new operating system for so many years that people forgot that any compatibility is needed anyway.