1) What happens with custom styles? Will they work? Yes....
2) What about styles with template edits? Will they have to be re-done, or will they remain? Custom edits will stay but new additions such as Ad Location need to be inserted into the relevant spots
3)Do you think most modifications will work or is 3.7 too much of an upgrade from 3.6.8? Yes...I have experienced 3.6.8 to 3.7 and all my mods worked.