When you boot from the Windows 7 DVD and select Custom install, there is a link under the drive selection window for Advanced drive tools. Here you can delete any/all of the partitions shown, create New ones as desired, then format before install.
If you already have partitions set up for a Dual Boot then just make sure you highlight the correct one where you want Windows 7 installed. It will configure the dual boot menu for you during install.
If you want to get rid of XP, highlight it first, delete and create New partition(s) as desired to format.
I had earlier suggested Partition Wizard because of the possibility your XP took up the whole drive and needed to be shrunk to create a second partition for dual boot. You can confirm your current partitioning by looking in Disk Management, or running Partition Wizard. You can also change your partitions size using PW.