Rehash Drupal 7 passwords into SHA1
There are a couple of ways to do this.

You need to look into the function user_authenticate.

In that function, you will see there is a call to variable_set() that sets the path to the variable password_inc. So, basically you could overide the path of this file, change it so it points to your custom password.inc, in a custom module out of core code.  In that file you would redefine the same functions with your own logic. 

There could well be a simpler way of doing this.  I know single-sign on can also be easily done with Drupal 7 as there are functions that make this easily available out of the box. Maybe look at OpenID code or other contrib modules if you choose to use that path.

Good-luck!