In an ideal world installing XP Mode in Win7 should work. When one contemplates that Microsoft taunted this as an actual selling point it sickens me.
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Unfortunately, it is not an ideal situation or an ideal world. I too once I got Win7 Pro thought (wow, Id love to play some of my old games [of which I have hundreds] master of orion ii and just all kinds of others) that ok I will divy up my drives install win7, set up my dual boot, install slackware (as I will not program or do word processing in windows only in *nix). then go back and install xp mode and then install some of my games (brain drool). wrong..
you see xp mode in win 7 unless you use another virtualization product or use virtual pc and actually install xp.. does not include support for directx which I found out to my utter dismay. thus when you go to install programs or run them your video and sound drivers wont work. now if your program does not use directx (maybe it uses opengl or something) you might stand a chance.
you stand a better chance with dosbox in win or one of the several dos emus in linux as at least those are proven to work with a good deal of the games from that 'era'. I feel as though Microsoft was very shortsighted during the R&D sessions while cooking xp mode up. 'lets give them the feel of xp but with only half the functionality to where ONLY MS products and maybe a few 3rd party apps will work' they didnt allow the idea to mature as you see while many home users such as myself do work on their machines (a write, mix, and record music from home on my box) when the work day is over I like to play games and I am not in the minority in that regard. lastly, there are freeware solutions (as previously mentioned by myself and others) that will allow you to cure that hankering for your old skool gameage without having to sort thru microsoft's lame idea of virtualization. seriously, I can boot up linux (totally free) load WINE install an xp or 95 , 98 era game and have it running in 1/16th the time it takes you to install xp mode and not have to lay down 1 penny to do it