Is there a way to convince these Microsoft tools to play nice with each other? I have Win7 home edition, but I would be willing to upgrade to Win7 Pro IF I knew it would work under the "XP emulation" mode.
It should work under "XP emulation" mode because the tool will be running under a virtualised XP computer. You may want to "try before you buy" using Microsoft Virtual PC and installing a copy of Windows XP in there. Virtual PC uses the same technology as XP Mode.
Failing both those options, what is the least expensive "upgrade" path for C++? I don't need a bunch of other junk, just the C++ compiler. The goal is to retire my XP system since currently the only reason I keep it is to compile C++ programs that eventually are run under Win7.
Microsoft makes Visual C++ Express available for free, although if you are used to Visual C++ 6 then you are in for a bit of a shock. I would choose it for myself, however.
You could also try NetBeans C++ or Eclipse with the CDT plugin. Dev-C has also been popular, although outdated. Not that I think it matters for you.