Creating a restore point is well worth doing before you install.
Elements keeps the stored picture data in a file called 'Catalogue' I am unsure about XP, I use Vista, but if you look in:
C/ProgramData/Adobe/Photoshop Elements/Catalogs/My Catalog
you should find your stored data.
When you install Elements 7 and you already have Elements 5 installed, it will create a new folder in 'Catalogs' called 'My Catalog7.
When you run the new Elements 7 program and select Organise, you have the option under file - Catalog... to restore the catalog, you then need to follow on screen instructions to connect Elements 7 to the old catalog.
I would strongly suggest making a back up or copy of the catalog file either to a DVD or to somewhere else on your hard drive/external drive before you attempt any of this work.
For safety I wouldnt delete any files at all until you are satisfied that Elements 7 organiser is fully working ,and that all your data has been transfered to 7.
Hope this helps
Trev