(I initially wrote this as a comment to this post but it seemed important enough to make into a post.)
Lately, I have noticed some confusion between Windows XP Mode and Windows xx Compatibility Mode — the former being a full image of Windows XP that runs within (some versions of) Windows 7, and the latter simply being a setting that tries to trick a program into working by applying settings from older versions of Windows.
Windows xx Compatibility Mode is accessed by right-clicking a program, and then clicking the “Compatibility” tab. It is (to my knowledge) available in any flavor of Windows 7 (Vista and XP had this capability, too).
In contrast, Windows XP Mode only runs on a couple high-end flavors of Win7, and requires a full download of Windows XP and Windows Virtual PC. More info here: http://www.microsoft.com/windows/virtual-pc/get-started.aspx.
Just clarifying. As usual, Microsoft hasn’t made things easy with how they name stuff. 