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There are multiple ways to install/run XBMC.
Many users install it as an application that runs on top of Windows 7.
OpenELEC basically bundles the operating system and the "application" XBMC into one package that can be installed for free, without the need to buy Windows 7 etc.
PROS:
boots directly into XBMC (perfect if you're only looking to play content)
no need to buy Windows license etc
CONS:
No Windows 7 etc, if you want to use the system for things other than watching/playing content
I'm sure others could add to this list, but if you checkout the link Beer40oz shared, you should get all the info you need.
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Thanks for that explanation Newoski