Intel's latest naming scheme is somewhat confusing because the names don't always mean differences in features, just differences in price. For standard-voltage Arrandale CPUs, the advantage of i5/i7 over i3 is that the i5 & i7 branded CPUs have Turbo Boost, an automatic overclock when the processor is below thermal threshold and/or is not using both CPU cores. This tends to have a greater benefit if you use applications or games that are not optimized for multi-core processors. However, all the i3/i5/i7 CPUs are based on the exact same technology and with the exception of Turbo Boost, their performance per clock speed is identical. They are also interchangable and all fit in the same socket.
My only warning about switching CPUs is that switching to a quad-core i7 (Clarksfield) may not work due to different motherboard/BIOS expectations regarding graphics. The dual-core Arrandales have graphics integrated into the CPU but the quad-core Clarksfields don't.