Windows 7 is available in Home basic (Available in Emerging Market), Home Premium, Professional, Ultimate. (enterprise is available using Volume License only).
Home basic or Home Premium is more than enough if you want to use it on Home computer. Home basic is available in 32bit version only. Home Basic can't join domain.
Windows 7 Professional and ultimate has almost all the features of Home basic and Home premium. Windows 7 Professional and ultimate can join domain network. You can protect your files with Bit Locker. This feature is available only in Windows 7 ultimate. Ultimate allows you to work in 35 diffrentlanguages.
You need compatible hardware:
Before you upgrade make sure you have compatible hardware. As per Microsoft Windows 7 will run on Minimum 1Ghz Processor and 1GB RAM.
If you want to use all features of Windows 7, you may need Minimum Core2Duo processor with 2GB RAM and a better graphics card. If you want Windows 7 64bit, you will need processor with 64bit support.
Application Compatibility:
This should be your major concern if you are using any third party applications, still many application may not work on Windows 7 32bit or 64bit. You can contact your application vendor for more details.
Here you can use Windows XP mode for your XP compatible application. Windows XP Mode lets you run older Windows XPsoftware on your Windows 7 desktop.
Windows XP Mode comes as a separate download and works only with Windows 7 Professional and Ultimate. Windows XP Mode also requires virtualization software such as Windows Virtual PC. Both are available free on the Microsoft website. Note that you may need compatible processor and extra RAM to use this feature.
Drivers for Printers and other hardware:
Make a list of your existing hardware and check if drivers for your hardware is available. You can check in forum, manufacturer's website or contact your hardware vendor for drivers.