Backup your BCD using DualBootPRO from the Care Center tab, make copies of the file bootmgr and the folder Boot plus contents and place these items (including your BCD backup) somewhere you can easily access them later and not on the Windows XP drive/partition.
Just a word of caution before you go any further. The (System) partition contains the boot system files for Windows 7 (the two items I mentioned above) and for Windows XP. You will not be able to format that partition from Windows...it will simply refuse to do so. At best you can shrink the partition from the Windows 7 DVD command prompt. If you are not familiar with using the command line I can guide you and give you the commands you need to run in DiskPart and to restore the all three items I mentioned above. We will also need to fix the mbr (master boot record) of your physical hard drive and fix the boot sector of your physical hard drive. Again I can give you the commands you need to run. This all takes some doing and is quite risky. If you make the slightest mistake you can permanently lose the ability to boot to either OS.
There is another way to do it, also using the Windows 7 DVD and that is to do as I suggest in the first paragraph above and place those items all on the root of your Windows 7 partition. Then to delete the Windows XP partition again from the command line command prompt of your Windows 7 DVD, and fix the mbr and boot sector. Once that is done you will need to run a startup repair and hope that startup repair finds everything in order, repairs your startup and wallah!
If you would like to proceed I am happy to guide you through the steps you need to take. It's not such a big deal to do and quite achievable but I just want you to understand the down side and you MUST backup all the stuff you want to keep, like data, pics, music, emails etc. preferably to a USB drive not on your system that you can unplug during this process. I recommend the second process I mention as being the simplest to execute.