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Virtual Real Mode
The third mode of processor operation is actually an additional capability, an enhancement, of protected mode. Protected mode is normally used to run graphical multitasking operating systems such as the various flavors of Windows. There is often a desire to be able to run DOS programs under Windows, but DOS programs need to be run in real mode, not protected mode.
Virtual real mode was created to solve this problem. In essence, it emulates real mode from within protected mode, allowing DOS programs to run. A protected mode operating system such as Windows can in fact create multiple virtual real mode machines, each of which appear to the software running them as if they are the only software running on the machine. Each virtual machine gets its own 1 MB address space, an image of the real hardware BIOS routines, everything.
Virtual real mode is what is used when you use a DOS box or run a DOS game in Windows 95. When you start a DOS application, Windows 95 creates a virtual DOS machine for it to run under. Virtual real mode was introduced starting with the 386 family of processors.