Maintaining backwards compatibility has always been a pain, but with the Windows 7 Release Candidate almost upon us things look like they might get easier. It's been announced that Ultimate and Professional editions of Windows 7 will include a licensed copy of Windows XP. Windows 7 would then run a Virtual PC copy of Windows XP for legacy applications. You will select applications that run in 'XPMode' and these legacy applications will be executed within the virtual copy of Windows XP. I've seen Word 2003 running under XPMode in Windows 7 and it looks similar to VMware fusion on OS X.

You can get some more details on this here. An even more detailed explanation of this can be found on withinwindows.com