You can run SecurAble to determine if your machine has hardware Virtualization capabilities.
If your computer does not have that green tick then XP mode shouldn't work. You also require some extra resources to virtualize stuff as well.
Excerpt from GRC:
• How does Hardware Virtualization help with security?
“Virtual Machine” technology is used to create fully contained environments that can be used to insulate the real hosting operating system from any actions taken by software running within the “virtual” environment. Although this security benefiting virtual machine technology has been used for many years, its widespread adoption has been slowed down by the significant performance overhead imposed by software emulation of the virtual environment. Intel's and AMD's native hardware support for virtual machines means that virtually all of this emulation overhead can be eliminated from both the host and virtual environments. This makes the use of virtual machines for security containment much more practical.*
The second benefit of hardware support is that even malicious software running with maximum privileges in the system's kernel is unable to escape from virtual containment. Thus, hardware support for virtual machine technology introduces the possibility of creating a “hypervisor” to operate at a hardware-enforced level below the operating system “supervisor” which opens many exciting possibilities for further enhancing the system's security. It will likely be several years before these capabilities are offered natively within Windows, but we might expect to see third-party security software publishers taking advantage of these features in the near future.
To answer your questions:
1. From reading this I guess it requires HV due to security purposes.
2. Well if your missing HV then it isn't going to work.