Windows 7 is going to virtualize XP so 7's pretty much completely compatible with XP.

Microsoft says there's a secret XP Mode (XPM) for its new rep-redeeming operating system that hasn't been part of any beta code or even disclosed before that's "specifically designed to help small businesses move to Windows 7.

It says it will run "many older productivity applications," probably the programs that Vista had trouble with as well as legacy 32-bit programs. Windows 7 is after all Vista fixed up.

Microsoft code honcho and director of Windows enterprise and virtualization strategy Scott Woodgate explained on a Windows Team Blog late last Friday that these apps can be installed directly in the Windows XP Mode, which he described as a "virtual PC environment running under Windows Virtual PC."

"The applications will be published to the Windows 7 desktop and then you can run them directly from Windows 7," he said, meaning that they run alongside Windows 7 applications under a single desktop.

It appears to mean that it's Microsoft's way of starting with a clean piece of paper, something Microsoft was toying with back when Cairo was a gleam in Bill Gates' eye.

Woodgate said Microsoft will be releasing the beta of XP Mode and Virtual PC for Windows 7 Professional and Windows 7 Ultimate "soon."

Microsoft acquired Virtual PC when it bought Connectix in 2003. It was meant to run multiple DOS, Windows or OS/2 operating systems simultaneously on the same machine.

The XPM revelation came after Microsoft gave the Windows 7 Release Candidate (RC) to some key testers. Since they couldn't keep it to themselves, Microsoft had to confirm that it means to release the RC to its teacher's pet MSDN and TechNet subscribers on Thursday April 30 followed by general release on Tuesday May 5.

Of course there are bootleg copies of the RC (Build 7100) already out and about in the wild.

The RC is supposed to be the last step before Microsoft packs the thing up and sends it to market.

Microsoft may try to catch the back-to-school wave; it needs the money; Windows sales were off 16% in the March quarter. Worse case it will shoot for Christmas sales although officially the final code is only due by early 2010.

Bloggers Paul Thurrott and Rafael Rivera, claiming special Microsoft-imparted knowledge, said XPM is next-generation host-based Virtual PC widgetry that needs the processor-based virtualization support of Intel and AMD.

Thurrott and Rivera say they expect this to be the end of the line for Virtual PC and that future client versions of Windows will include a Hyper-V-based hypervisor.

They also say that XPM will work with a licensed copy of XP SP 3 and will be free to users of Windows 7 Professional, Enterprise and Ultimate via download, in other words separate from 7.

Thurrott and Rivera are writing a book called Windows 7 Secrets due in the fall.