Yes, you can use Windows xp or Windows 7. I have used both without issue. Your biggest challenge (and if you are computer savvy at all it isn't a big deal) is getting your com ports to work properly. Most newer machine don't have serial ports anymore, so you will need a NULL usb to serial adapter.

You should also be able to go right to the latest version.

Yes, it will work in XP and above, provided you aren't using the 64-bit version of the Windows code. (If you don't know, you probably aren't.) You may have to change the properties on the executable to run in Win 95 compatibility mode, though.

There's no need to upgrade to interim versions. Do you have the null modem cable already? That sometimes trips people up.

(Edit: timing overlap w/ ralph. What he said.)