Greetings Will,
1. You are absolutely correct, always backup before you do any kind of software or hardware change on your computer.
2. Apple suggests using iLife '11 in conjunction with Lion as thats the version that was tested.
-- I have personally tested iPhoto '06, '08, and '09 with Lion and they work in general, but not perfectly. This makes sense as they were created before Lion ever existed so some of the code doesn't match up with the new OS.
Lion does not move any files in the default location where iPhoto stores your pictures (Your User > Pictures > iPhoto Library). As long as you have not moved your library to a non-standard location there should not be any issue with file movement associated with Lion.
Regardless, backup your data regularly, especially when considering a large change like a new OS.
Cheers.