Do I have to backup the files with the Windows utility on the upgrade disk prior to installation?
You don't HAVE to, but it would be wise to do so.
Any time you make major changes to the os you should backup first.
But use the W7 Easy Transfer Wizard not the Vista one.
To use the W7 Easy Transfer Wizard:
Browse to the DVD drive on your computer and click migsetup.exe in the Support\Migwiz directory.