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Yes, you absolutely can replace a 5400 rpm hard drive with a 7200 rpm hard drive.
There are a few things to be aware of:
You might notice a bit of performance increase for applications that store, retrieve, and update a lot of information on the hard disk. If you have just 1GB RAM memory installed, you might notice more of a performance increase, because the computer writes and buffers more information to the hard disk more often because of a 'shortage' of RAM. I do recommend upgrading to the maximum RAM supported by your Mac for the best overall system performance. Reilable vendors such as OtherWorldComputing (www.macsales.com) have RAM and hard disk upgrades as well as complete kits with necessary tools and instructions to help you.
You might notice a decrease in battery life. I've had three different hard disks in my mid-2007 MacBook, the original 5400 rpm 120GB Fujitsu drive, a 7200 rpm 320GB Hitachi and the current 7200 rpm Seagate drive.
The decrease in battery life was mainly noticable, maybe 12 to 15% - from 5 hours to 4:15, when I'm using an app that causes heavy disk usage, like rebuilding my iPhoto library. A slight performance increase, a vast increase in storage space, and the fact that I'm never far from an outlet meant that it was not an issue for me.
The third thing some people report is that some 7200 rpm drives make more noise in quiet environments. If you use your MacBook in a quiet library often, you might notice it. I use mine at home, and have never noticed extra noise.
Some people report that their 7200 rpm drives seem to generate more heat than the 5400 rpm models. I've never noticed it.