Macbook from 2007 - Need to update but can't. Help!?

Your next step will be to upgrade to Snow Leopard (10.6). Check the Apple link below for requirements and purchasing info.

http://store.apple.com/us/product/MC573/mac-os-x-106-snow-leopard

You have to understand the difference between an Update and an Upgrade.
An Update is a free change to add to the base code or as a bug fix within an existing Operating System. Such as the .8 added to 10.5.
An Upgrade is a complete new Operating System that must be purchased. Such as 10.5 Leopard to 10.6 Snow Leopard.
10.5 Leopard was written for Power PC Macs with code added to force it to run on Intel processors.
10.6 Snow Leopard has completely rewritten code and only runs on Intel Macs.
10.7 Lion used some 32 bit which allows it to run on Late 2006 through Early 2008 MacBooks and a lot of 64 bit code.
10.8 Mountain Lion is pure 64 bit, which excludes more systems than Lion did. It can only run on the Late 2008 through Mid 2010 MacBooks. It's not something you can add memory to, for example, as it involves the base architecture.

To see which model you have go to the Apple in the upper left corner and select About This Mac, then click on More Info. When System Profiler comes up check the Model Identifier

Your MacBook can run Lion (10.7), but if it were me, I would upgrade to Snow Leopard (10.6). I believe Snow Leopard is the best of the OS X operating systems.

Go to 10.6 Snow Leopard first. The 10.6 Snow Leopard DVD is in the Apple online store. You can get it for $19.99. After you’ve installed that then use the 10.6.8 combo updater to finish it off. http://support.apple.com/kb/DL1399 You will need to be running 10.6.8 to access the App Store to order Lion which is the maximum that a 2,1 will run.. http://store.apple.com/us/product/MC573/mac-os-x-106-snow-leopard

System Requirements for 10.6:

• Mac computer with an Intel processor
• 1GB of memory
• 5GB of available disk space
• DVD drive for installation
• Some features require a compatible internet service provider: fees may apply.

Once you are at 10.6.8 Lion is still available from Apple. You will have to call Apple Customer Care 1-800-692-7753 or 1-800-676-2775. to purchase it. Then within 3 days you will get an email with a code which you can use to download Lion from the App Store. Or go to http://store.apple.com/us/product/D6106Z/A/os-x-lion and purchase it there. The price is $19.99.

Lion will require at least 2gb of RAM but really needs 4gb to run smoothly.

As for third party programs see this list for compatibility with 10.7 http://roaringapps.com/apps:table

Also Lion doesn't run any Power PC programs. To see if you have any Power PC programs go to the Apple in the upper left corner and select About This Mac, then click on More Info. When System Profiler comes up select Applications under Software. Then look under Kind to see if any of your applications are listed as Power PC. Universal and Intel will run under Lion.

Before Mac switched to Intel processors in 2006 they used Power PC processors from 1994 to 2005. Power PC 601 through 604, G3, G4 and G5. Applications written for the Power PC processors need the application called Rosetta to run on Intel processors. This was part of the Operating System in 10.4 and 10.5 but was an optional install in 10.6. With 10.7 Lion Apple dropped all support for Power PC applications.

You can put two 2gb RAM sticks in your model 2,1 but it can only use 3,3gb. This is a hardware limitation and cannot be changed.
http://en.wikipedia.org/wiki/3_GB_barrier
http://www.everymac.com/systems/apple/macbook_pro/faq/macbook-pro-core-2-duo-3-g b-memory-limitation-details.html

OWC tests have found that there is a slight speed increase with having two 2gb sticks in rather than one 1gb and one 2gb. Your model is in the gray lines at the bottom of the graph. http://eshop.macsales.com/shop/Memory_Benchmark/Apple_MacBook/