First, Welcome to the Apple Discussion Forums, Roxie's Mom!
The latest OS X version is OS X 10.8 Mountain Lion. In order for you to update to this you need to find, purchase and install OS X 10.6 Snow Leopard.
Currently, neither are available online at Apple and OS X 10.8 Mountain Lion is a download only from the Mac App store.
You should be able to by a copy of OS X 10.6 Snow Leopard direct from Apple's customer service number.
1-800-MYAPPLE. Ask for software sales then tell them you wish to purchase DVD of OS X 10.6 Snow Leopard.
It's cheaper to get here than to find it elsewhere online.
Once you installed OS X 10.6 Snow Leopard, you need to use Software Update in your OS X system preferences pane to update to OS X 10.6.8 Snow Leopard. Installing this updater will give access to the Apple Mac App Store via an icon in your OS X dock. launch the Mac App Store icon to access the store, locate OS X 10.8 Mountain Lion update to purchase, download then install.
Before you do all of this, you need to purchase additonal RAM for your iMac. Your model can take up to 6 GBs of RAM, max. You can install 4 more GBs of RAM. Newrer iterations of OS X need more CPU, GPU, HD and RAM resources.
The more RAM you have in your IMac, the better OS X and other applications run.
You can purchase relaible Mac RAM from these two online vendors.
http://www.crucial.com
Or here