If you were sold a PC with bootleg Win7 then you'll need to Clean Reinstall with Genuine Windows after wiping the HD with Diskpart Clean Command first.
Since you must do this you might as well correctly install XP first as is optimal in a Dual Boot with Win7, even if you install it to the last created partition so it can be more easily removed later. You can create your partitions after wiping HD using the XP CD then full format the XP partition before install.
Then Win7 installer will configure the Dual Boot during Clean Reinstall - OEM Windows 7
I would buy or borrow an external HD to store my data, or upload up to 7gb with each Windows Live ID to Skydrive, which can also Sync your user folders to storage and other devices. Sync Any Folder to Your SkyDrive Account | PCWorld