Installation will proceed exactly as it would on a normal PC running Windows XP. To use a program with XP mode, run the program’s installer within the virtual machine running Windows XP. Any program that would run in Windows XP should run in Windows XP compatibility mode. This means that the compatibility offered through Windows XP mode is perfect. In effect, your computer is running two operating systems at once.
Running the Windows XP Compatibility Mode opens a new window on your desktop that is running a full version of Windows XP. The Windows XP Compatibility Mode, on the other hand, allows you to launch a full virtual machine running Windows XP. Previous attempts by Microsoft to enable compatibility have functioned by making adjustments to the way the installed operating system handles a program, but went no further. The name of the feature actually under-sells what the feature does. If you have the Professional or Ultimate version of Windows 7 you can address any compatibility issues that you have with Windows XP programs by using the Windows XP Compatibility Mode feature.
This is likely if the developer has not released any patches or updates for the program since the release of Windows Vista. There is the possibility that the programs you have installed on XP won't work with Windows 7. This indicates that there are some major changes between XP and Windows Vista/7 that run deeper than superficial features and interface work. If a program runs on Windows Vista, it should run on Windows 7.
While it is certainly possible that there is a Vista program somewhere in the universe that absolutely won't work on Windows 7, I have never heard of this occurring. This is good news if you are migrating from Vista, because it means you'll have virtually no software compatibility issues to worry about.