1) Definitely do this to protect it.
2-3) If you're planning on having a new OS install anyway, then yes, otherwise, you could just use a liveCD that you can get TrueCrypt running on (technically, even a LiveCD with 7.2 built-in might be OK here since that could decrypt).
4) You wouldn't necessarily have to install TrueCrypt, you might be able to get away with running a portable version. Also, you DON'T need to encrypt the new OS.
5) Assuming you mean decrypt here, then yes, the goal is to decrypt the encrypted drive. You do not want to do any writing to it unless it is to decrypt it or you are writing to the mounted encrypted volume.
6) You're going to have to choose the drive/partition and the appropriate mounting options, it won't be automatic. For instance, if you're mounting it to manually pull files out of it because you cannot find a way to decrypt it, then you're going to have to choose the "Mount partition using system encryption without pre-boot authentication" mount option.
7) As discussed in (5), you don't need to encrypt the new drive to begin with. As discussed in (6) you may not find a way to decrypt the old drive (though it seems like there are a number of ways in which it should be possible), in which case you'll only be recovering files from it before attempting more dangerous operations or wiping it out.