I really want to know what the XAP file on Windows Phone 7 is; how important it is; and how I can create it. Could you help me?
XAP is the application package - it is the distributable unit that allows you to install the application on a device (or emulator). Basically, it is a ZIP file with a different extension. If you change XAP to ZIP, you'll be able to read its contents fairly easy.
The XAP file format was inherited from standard Silverlight, and since WP7 is built around the same fundamental core, the file format remained unchanged.
Here is a pretty good description of what it does (remember, that even though it talks about Silverlight, the same main idea applies to WP7): http://beyondrelational.com/blogs/dinesh/archive/2010/08/18/what-is-xap-file.aspx