You CAN run 10.7, but I don't advise it, buy the 10.6.3 upgrade disk from the Apple Store online and then backup files off the machine and upgrade to 10.6.3., then Software Update to 10.6.8 would be the BEST option for your older hardware and it will run most all of your 10.5 software and be faster than 10.5 or 10.7.
If you go to 10.7 it won't run nearly any of your 10.5 software and you will have to buy all new ones for a machine that's getting a little bit dated, near it's end of life stage. 10.7 will slow your machine down, especially with low RAM.
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At your machines stage, the hard drive is getting old, the vents are clogged up with dust and it's going to cost a bit to get the drive etc upgraded. You can if you wish, but 10.7 really needs more RAM (4GB) and a faster hard drive.
But your still subjected to the video card going out etc.
IMO upgrade to 10.6.8 and stay there until the wheels fall off, then buy a new 10.8 machine being released after this summer or 10.9 machine. 🙂
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