This is because your watermark in a header is essentially a background image. Anything added to an individual page will always be on top. When you're converting to Office 2007 it is probably copying the watermark to every page when you do the conversion (which can also be problematic).
The best solution is to place your watermark where it won't be unduly obscured by the page contents; the top, bottom, left or right margins.
I usually place Draft watermarks at the top of the page and for a more permanent watermark I rotate the text and place it along the left margin.