Yes, what you suggest would work in most cases. See these M$ web pages for info on upgrading, what it does, and what types of upgrades are possible.
http://windows.microsoft.com/en-CA/windows7/Installing-and-reinstalling-Windows-7
Specifically for an upgrade from VISTA to win 7, this page:
http://windows.microsoft.com/en-US/windows7/upgrading-to-windows-7-frequently-asked-questions
tells you which VISTA versions can be upgraded to which Win 7 versions, plus other info.
I presume you will want to install to your new 2TB drive, and probably plan to remove the old drive entirely because you're worried about its reliability. That can be done. You will have to pay close attention to which HDD unit is being used for the installation. Also you should probably use an option in the Install procedures that wipes out any previous Partition on that 2TB unit so it is completely empty before starting the actual installation. But make SURE you wipe out ONLY the new 2TB unit, and not the old one!!
You MIGHT have a problem after it's all working. With most installations of Win 7 (I'm NOT sure whether this applies to an upgrade, but I assume it will), it does a process designed to help you out of trouble later. IF it finds a second HDD in your system (and in your case, it will), it places a special set of system backup files in a semi-hidden spot on the second HDD. From then on, every time the system boots, if it has a problem with a corrupted or missing system file, it automatically goes to the safe backups on the other drive and restores good copies from there, then completes the boot process. Very nice way to save you a lot of frustration if it ever happens. BUT this also means that, every time it boots, the system will verify that those backup files are still available, and it they are not (like, if you have removed the second drive) it refuses to boot!
Now, there is a way to fix this problem. Basically, after you have removed the second HDD and can't boot because of this error, you can use your original Win 7 Installation CD to fix the problem by placing a new set of backup files in a semi-hidden spot on the only remaining drive (the boot drive) in your system. (Having them there is not quite as safe as having them on a separate HDD, but it's still pretty good.) Check the M$ website for "Startup Repair" in Win 7 for details.