Just wondering... but why on earth would you want to move from a modern OS that runs faster on similar hardware (well, so long as you have 1GB of ram for 32bit, or 2GB of ram for the 64bit), to an aging 10 year old OS that is about to loose support from Microsoft?
Anywho, simply put your CD in the drive, boot from it, format the disc, and install like you would on any new PC. Dual booting is another excellent option like WR2 mentioned if you have that one program that just refused to run in compatibility mode on your PC.
You should know that Microsoft is ending all support for Windows XP in less than 2 years. In 2014 they will no longer issue updates including security updates for XP anymore. So either stay with Windows 7 now or you will have to upgrade to Windows 7 or 8 then. Either way XP is going away for good so you might as well deal with it now while you have Windows 7.