Option 1 "Windows 7 update from Microsoft which allows XP compatibility mode" will not work, since it is only for Win 7, 64bit Professional and I'm running the Home version.
I'm trying to run Palette version 5.6 "Layout and Editing" from Baby Lock for Creative Embroidery Software. It runs fine in Windows XP and the software vendor is saying that it will not run with Windows 7, 64 bit. The program starts and flashes the main screen (console), then dies. I've tried running it in Compatibility mode (Win XP, SP 2), but still no luck.
You still have an option which is to get either Virtual Box or VMWare Player and then install Windows XP into a virtual machine through either of those applications. I myself like the VMWare Player but either one is excellent and both can do 3d acceleration.
You can also get Virtual PC from Microsoft. None of those require Windows 7 Professional.