Why does Windows 7 need hardware virtualization to run XP mode?

"You can run SecurAble to determine if your machine has hardware Virtualization capabilities.

If your computer does not have that green tick then XP mode shouldn't work. You also require some extra resources to virtualize stuff as well.
Excerpt from GRC:

• How does Hardware Virtualization help with security?
“Virtual Machine” technology is used to create fully contained environments that can be used to insulate the real hosting operating system from any actions taken by software running within the “virtual” environment. Although this security benefiting virtual machine technology has been used for many years, its widespread adoption has been slowed down by the significant performance overhead imposed by software emulation of the virtual environment. Intel's and AMD's native hardware support for virtual machines means that virtually all of this emulation overhead can be eliminated from both the host and virtual environments. This makes the use of virtual machines for security containment much more practical.*
The second benefit of hardware support is that even malicious software running with maximum privileges in the system's kernel is unable to escape from virtual containment. Thus, hardware support for virtual machine technology introduces the possibility of creating a “hypervisor” to operate at a hardware-enforced level below the operating system “supervisor” which opens many exciting possibilities for further enhancing the system's security. It will likely be several years before these capabilities are offered natively within Windows, but we might expect to see third-party security software publishers taking advantage of these features in the near future.

To answer your questions:
1. From reading this I guess it requires HV due to security purposes.
2. Well if your missing HV then it isn't going to work."

Windows 7's XP mode actually only consists of the license, I believe; you can run the hard disk in another VM solution. It recomends a specific version of Microsoft Virtual PC (big surprise!), which requires hardware virtualization. I do not know why this is required, but this article explains the UI well: http://blogs.zdnet.com/Bott/?p=896

"Not an answer - but I figured out how to manually hack my bios to enable hardware virtualization because I have a Sony Vaio, and Sony turn off Hardware virtualization, even though the hardware is capable of this - just a bios flag!

Perhaps instead of trying to figure out why MS made this a requirement. Might be time to find some google posts on manually applying a BIOS hack for your model of notebook, and enjoy the benefits of hardware virtualization.

In your case though - HP dc7800, seems like your system actively supports VT."