Windows watchers Paul Thurrott and Rafael Rivera report today that Microsoft's upcoming Windows 7 will be accompanied by a special "Windows XP Mode" that uses virtualization technology to run applications made for the (much) older operating system.

The move is interesting because of the widespread software compatibility problems that plagued the release of Windows Vista, XP's successor. Although the leap from Windows Vista to Windows 7 isn't expected to be as tough, many people are still using XP precisely because of Vista's early compatibility problems. In that way, the XP mode could help ease the transition to Windows 7.

Thurrott and Rivera were given early access to the technology. Here's how they say it will work:

XP Mode consists of the Virtual PC-based virtual environment and a fully licensed copy of Windows XP with Service Pack 3 (SP3). It will be made available, for free, to users of Windows 7 Professional, Enterprise, and Ultimate editions via a download from the Microsoft web site. (That is, it will not be included in the box with Windows 7, but is considered an out-of-band update, like Windows Live Essentials.) XPM works much like today’s Virtual PC products, but with one important exception: As with the enterprise-based MED-V (Microsoft Enterprise Desktop Virtualization) product, XPM does not require you to run the virtual environment as a separate Windows desktop. Instead, as you install applications inside the virtual XP environment, they are published to the host (Windows 7) OS as well. (With shortcuts placed in the Start Menu.) That way, users can run Windows XP-based applications (like IE 6) alongside Windows 7 applications under a single desktop.

Ina Fried at CNet News.com was able to confirm the news.

Microsoft separately confirmed today that the Windows 7 Release Candidate is scheduled to be released to MSDN and TechNet subscribers on April 30, and to the public on May 5. As the name implies, that's traditionally one of the final steps before the operating system is ready to go. The company hasn't yet given a date for the final Windows 7 release, but it's widely expected later this year.

Follow-up: Microsoft confident, cautious as near-final Windows 7 is released