Your thinking is correct. If you look at the emitter, groups tab, you´ll find 3 groups for the emitter and mode is first group only. The only confusing thing - I´m going to write a report right now - group particle paint has a blue colour while when painted it is yellow. Within paint, I have chosen the emitter and this first group for painting, just doesn´t match the colour and had to set particle age before painting.
Now let´s take a look at infectio. As a colour mode, I set use groups and put in the other two groups from emitter (they have to belong to this emitter as it has the explosia source tag ! ) as groups to use for infection and incubation. As an incubation mode I set use "set from incubation rate" . This way incubating is progressing based on rate settings and this way incubation mod acts as a group change based on question/action would do. From seed object it is looking within set search radius if there is anything to be incubated and if there is, it puts it to group incubated as I named that group in emitter and put it to incubated group slot of the modifier. Infected follows accordingly and another group change to group infected is done (all by infectio mod, nothing you have to take care about). As this is the only group that has fuel ( remember I said all groups to extended mode so you can set physical data within groups) , it starts to burn now. ..
Hope that helps to understand the principle .