What you will need to do is purchase an upgrade version of Windows 7, such as Home Premium. Then, with Windows XP still on the hard drive, insert the upgrade DVD and follow the prompts. Or, you can pay extra and get full copy of Windows 7 and perform a clean installation, which is the recommended method as some people encounter errors when performing the upgrade.
The key on the bottom of your laptop only works with the Windows XP that was factory installed on your laptop. Even if you borrow a friend's Windows XP disk, your key will not work with any other installation disk.