I'm doing my 2012 taxes and have received a 1099 MISC form in which box 7 contains $4000 (non-employee) compensation.

I worked for a medical travel company for 7 weeks. Two months after my job ended, my attorney threatened suit on the medical travel company for an incident that occurred while on that job. The CEO of the travel company and my attorney agreed I would be paid $4000. The CEO sent a check for $4000 in my name to my attorney, along with a letter stating that this money was to avoid legal proceedings. Now, this February, I received a 1099 MISC form.

It's my understanding that income on this form is for 'services performed', as a contractor, etc.

Advice? How do I file this? Should I contact the former employer and ask that it be changed somehow. I'm lost here Please help.

1099 MISC is used by employers for legal settlements. But whether you should have received one, and which box should be used, depends on the reason for the settlement. In many cases box 3 is used.

From IRS.gov 'Lawsuits, Awards, and Settlements Audit Techniques Guide'
The following damages (other than punitive damages) are not reportable in Box 3 of Form 1099-MISC:
1. Damages received on account of personal physical injuries or physical sickness;
2. Damages that do not exceed the amount paid for medical care for emotional distress; or
3. Damages received on account of non-physical injuries (for example, emotional distress) under a written binding agreement, court decree, or mediation award in effect on or issued by September 13, 1995.
Damages received on account of emotional distress due to non-physical injury or sickness, including physical symptoms such as insomnia, headaches, and stomach disorders, are reportable unless described in 2 or 3 above. However, damages received on account of emotional distress due to physical injuries or physical sickness are not reportable.

Forgot to add - I do agree that box 7 is the wrong box unless you were a 1099 contractor working for them to begin with.
From the same part of the IRS:
"Generally, all punitive damages (even if they relate to physical injury or physical sickness), any damages for non-physical injuries or sickness, liquidated damages received under the Age Discrimination in Employment Act of 1967, and any other taxable damages are required to be reported in Box 3. Generally, all compensatory damages for non-physical injuries or sickness (for example, emotional distress) arising from employment discrimination or defamation are reportable in Box 3. However, if a taxpayer receives an award of back pay that constitutes wages, it generally would be reportable on Form W-2, not Form 1099-MISC."

If the $4,000 was a replacement of money that would otherwise have been earned, then Box 7 is correct.

Otherwise, contact the company to get the 1099 corrected to Box 3.