Compatibility Mode

Compatibility Mode is a setting to prevent incompatible features in Excel 2007 from being saved to a file that is saved in the old 97-2003 file format.
You will not be able to use new Office 2007 features which are incompatible with earlier versions of Microsoft Office.
Not all Microsoft Office Excel 2007 features are supported in earlier versions of Excel. When you work in compatibility mode or want to save an Excel 2007 workbook to the file format of an earlier version of Excel, the Compatibility Checker can help you identify issues that may cause a significant loss of functionality or a minor loss of fidelity in the earlier version of Excel.
This option is critical for users who plan to share workbooks with other users who have not yet migrated to Office Excel 2007.

This is automatically enabled in the following situations:
a) Open a file saved in file formats used by previous versions.
b) Convert a file from 2007 Office system to a previous version using Save As.
c) Set the application default to save using the file formats from previous versions of Office.

Compatibility Mode for 2007 and 2010

This allows you to open files saved in the old file formats
This disables any new features in Excel 2007 that are not compatible with the earlier versions. Any .xls fikes which are opened are automatically put into compatibility mode.
When you are working in compatibility mode this is indicated in the title bar
When you open a file created in a previous version of Office [Compatibility Mode] is displayed in the title bar.
This indicates that you may not be able to make use of all the features in the 2007 release.

This prevents any accidental use of any of the new features that are only compatible with the new file format.
You will also notice that workbooks saved as .xls take longer to open, save and close in Excel 2007.
To exit compatibility mode convert the workbook to one of the new XML file formats and re-open it.