how to copy favorites from XP to W7

On Windows XP, copy folder:

%USERPROFILE%\Favorites

The above looks like C:\Documents and Settings\<AccountName>\Favorites where <AccountName> is the user account name, and C: is the drive on which Windows is installed (which by default is C:).  If you enter %USERPROFILE% in Windows Explorer file address and press return, it will take you the parent folder of Favorites and you don't have to do anything with account name or drive letter.

If you're using a USB flash memory to transfer, locate Favorites folder as above and then right click on the folder and then click Send To command to copy to USB flash memory.

On Windows 7 computer copy the Favorites folder (already on USB flash memory) to the following location:

%USERPROFILE%

This looks like as  C:\Users\<AccountName>. Again entering %USERPROFILE% in Windows Explorer file address and pressing return will take you to Favorites parent folder.
Since Favorites folder already exists, confirm with yes to merge the existing and copied folders. Also, while copying over, you may be prompted whether to over-write some files (there are predefined web addresses identical on both machines) and you can just ignore these by responding to skip copying over.