When you buy Windows 7, you actually get a license for Windows XP to run the Win XP mode. So you install the Win XP mode and then download and install the VHD (the virtual hard drive file that actually contains the OS etc) itself. If you attempt to open this vhd in other virtualization software you will find that it crashes on boot.
I played around with it a little bit and this is what I found.
1. You need to open it first in the WinXP mode. There seems to be some kind of setup happening with the users etc. This runs only correctly only when opened in Wind XP mode.
2. Even after the setup, VMWare Workstation seems to have a problem importing this vhd and loading it up. I never got it running
3. VirtualBox was able to get this instance up and running fine (after the initial setup is complete). Though you would see a popup once in a while about not having a Genuine version etc, the OS will run fine. You will not be able to use Windows Update as the OS fails the Genuine Windows test.
WinXP mode seems to be doing something special to get around the whole activation and Genuine Windows stuff. What I do, is to run Windows Update etc in the WinXP mode and then load the same vhd up in VirtualBox to run my DirectX games (Check my previous post Why the Windows XP Mode may disappoint you??).
Why this is important? One, it saves me the trouble of having to install Win XP on a new VPC, activate it etc. Second, only one instance to manage from an update, antivirus, utilities perspective.


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