Delete the extended partition and create a new partition for W7. Install XP on the second hard drive, while the first hard drive is disconnected. In this fashion, both OSs are independent of each other, and you would use the F8 Boot Menu to select which to boot to.
EDIT: I looked cross-eyed at your screenshot, and didn't realize that there is only one hard drive. It is smaller than I would like to use for dual booting, because my W7 partition is larger than the entire drive. However, if you persist in your plan, I would wipe the entire drive and start over with 2 partitions.