Grr Ive had so much trouble finding anything
I've read that people can run and make xna games in windows 7 when the Game Studio is installed, but really you shouldnt have to install a gamestudio for it to work.
The only advice I have atm is that its compiled for x86 so no 64bit, and to check if .net 3.5 is installed as it seems to be using those libraries.
You said you tried running it in xp compatebiltiy mode, i remember on an xna forum that maybe installing the package in xp compat mode may help it.
Give it a shot if your willing, and thanks heaps for the assets Ive had fun with them. Im still keen to give a crack at programming the procedural rpg world and interactions. So I will still try to slowly develop something closer to my original idea and thus give the game some better purpose and direction.
Otherwise if you have access to an xp or vista machine it might be the only way