Windows 7 backup does not recognize XP backups - However, Microsoft does offer a free tool:
Windows NT Backup - Restore Utility
Utility for restoring backups made on Windows XP and Windows Server 2003 to computers running Windows Vista and Microsoft® Windows Server® 2008. Download Details - Microsoft Download Center - Windows NT Backup - Restore Utility
This download requires Validation from Microsoft - If your copy of the OS is less-than-legal, the Validation process could cause you some headaches.
Be sure to follow the instructions on the download page to the letter. And as always, create a system restore point and back up any personal data prior to downloading/installing the utility.
Best of luck to you!