Yes, go to to the anytime upgrade and run it and use the Key that came with the family pack. With xp you can run it by backing up the system first and then installing it. You need a usb hard drive to back up your doc. pic. and music first. The windows web site will talk you thru it if you have a computer nearby to follow along by the numbers.
You don't have to...many Windows 7 computers run Office 2007, since that was the only version out at the time.
The difference is that Office 2010 is also available in 64-bit, which is preferable if you are running W7 64-bit. Many say 32-bit works fine, but I ran into a problem once printing from 32-bit Office under W7 64-bit, and the solution many were recommending was to change over to 64-bit Office. It wasn't a common problem, but still...
So, I guess I would recommend trying Office 2007 first...if it works fine, stay with it. Otherwise, upgrade to 64-bit Office 2010 (assuming you are running 64-bit W7).
Beleive it or not, as an experiment I have installed Microsoft Office 2000 in Windows 7 Home Premium 64-bit and it works just fine. Not that I would recommend this old and unsupported version (althought it's certainly functional), but this shows how far back the compatibility goes.