Should I get an FM modulator or FM transmitter?

I used an iTrip in my Jeep Cherokee (European Liberty) 2004 and found it a complete pain to use as if I travelled across country I'd invariably find that the frequency that I'd picked at the beginning of my journey was used by some local station further down the road and I'd have to reset the frequency on the iTrip and on the radio. So I opted for the sort of solution you planned to install - in my case a USASpec adapter hooked into the CD port. But from what I see, the 2007 Jeep audio system is very different and USASpec don't seem to do one for it. But personally I'd spend the 200 bucks for the MOPAR one as the end result is well worth it. And if you team it with a Brodit Pro Clip holder with the pass through connector and keep it permanently connected to your iPod adapter then all you have to do is pop your iPod (or iPhone) into the holder and you're connected and good to go.

I don't know if it'll work for your car. But if you think the aux box is expensive...

http://www.instructables.com/id/Coro...ux-input-hack/
http://www.ehow.com/how_5178699_add-...la-stereo.html
http://forums.nasioc.com/forums/show....php?t=1818732

I did this and it's working relatively well. (cd quality or better) And my car is a Honda, fyi. So I only used the guides as reference.
Basically you tap into the left/right audio out on the cd player with the left/right wire of an aux cable, then take the grounding wire and attach it to the chassis of the head unit. Burn a cd with silent tracks (no gaps) and plug in your iPod.

If you want a connection through the dock connector, buy one of these cables:
http://www.dealextreme.com/details.dx/sku.34654
and a cigarette usb car charger.

Well, that's the cheap way. It works for most of the older cars.
I hear new decks have a digital connection, but new cars usually have aux-in nowadays.
If it's too much trouble, just get the aux box.
You still have to take apart the dash.