Yes, you are misunderstanding.
CERTAIN programs that run in XP will not run in Windows 7. "XP Mode" is a way to run those programs in Windows 7 and it is available in the Professional and Ultimate editions.
However, it's a different question whether or not Office XP is one of those certain programs. I doubt that it is and I would guess it would work on Windows 7.
But you might want to wait for confirmation on that specific point, just to be safe.