Windows 7 Home Premium is the best version to choose for older machines and/or simpler networks. The "Backup" offered in 7 Pro can be done easily with free tools, and unless you need complex networking, 7 has what it takes to manage a home network. Last, the 'XP Mode' promised in 7 Pro and above will only work on hardware new enough to support "Virtualization Technology" (stop by Microsoft's website to learn more). This isn't the same as "XP Compatibility Mode", which you will still have for all versions of Windows 7 (there's a great video explanation of this on CNET's website in their Windows 7 Center at CNET TV).

Some very important things you need to know about upgrading:

1) There are two types of upgrade: "in-place" (where a Vista machine upgrades to 7 and you get to keep all your programs) and "clean" (where you lose all your old programs and settings).
2) Anyone going from XP to 7 will have to go "clean".
3) Anyone going from a different Vista to 7 (for example, Vista Home to 7 Pro, or Vista Ultimate to 7 Home) will also have to go "clean".

If you have to do 2) or 3), all is not lost--I'll explain in a moment.

Before you even buy 7 for your machine, stop by Microsoft's website for two things:

a) download and run the Windows 7 Upgrade Advisor. Run it with every device connected to the machine that you'll ever want to use in 7. It'll thoroughly examine your machine for any roadblocks and give you good advice about upgrading.
b) Go to the Windows 7 Compatibility Center and double-check anything that came up negative in the Upgrade Advisor (or didn't show up at all). This site lists detailed compatibility info on a LOT of different devices.

Anything major, like a video card or sound card driver, I'd recommend double-checking with the manufacturer's website to be sure. This almost burned me on two of the machines that I upgraded.

Last, make a backup. There's a free tool called Macrium Reflect that can do this for you.

Do you have to do a "clean" install, but just want to carry over your user accounts and settings? Microsoft makes a program called Windows Easy Transfer that's already in Vista (and can be downloaded from Microsoft for XP) that will export your accounts and settings and let you import them back again. It's very easy to use and does a good job of putting your accounts back together again, even going from XP to 7.

Do you have to do the "clean" install, and you don't want to reinstall all your programs? Laplink has an offer for $19.95 that will let you use a special version of their program "PC Mover" to upgrade one machine one time. Read the documentation in detail.

The most important thing to doing a "clean" install is that in the Upgrade setup you choose "Custom". Windows will take all of your major files and place them in a folder called "Windows.old". PC Mover and the Easy Transfer program will use this folder to reconstruct your system from, so this is VERY important.

I wish I had more space to go into detail here...bottom line is, if you plan ahead a bit, upgrading to 7 will go very easily (and if it doesn't, you'll have something to fall back on).