Nothing wrong with your XP Mode.
Your host machine (Windows7) sees and treats XP Mode or any other Virtual PC machine as a remote computer, using Remote Desktop Connection
to let you to use it.
If you are not familiar with remote desktop connection, open the Windows Help & Support, type Remote Desktop
to search field and hit Enter
. Choose Remote Desktop Connection: frequently asked questions
. A more comprehensive description is here: Remote Desktop Services - Wikipedia, the free encyclopedia
Sorry to say but it seems you can not play your FS 2004 on XP Mode.