Software Update won't take you any further than 10.6.8. Your Mac is suitable for Lion - to purchase it, go to the Online Apple Store and search for 'Lion'. You will get a code which enables you to download it from the Mac App Store.
If your Mac is suitable you can go straight to Mavericks, which is directly available in the Mac App Store. The requirements are
- OS X v10.6.8 or later
- 2GB of memory
- 8GB of available space
and the supported models are:
- iMac (Mid 2007 or newer)
- MacBook (Late 2008 Aluminum, or Early 2009 or newer)
- MacBook Pro (Mid/Late 2007 or newer)
- Xserve (Early 2009)
- MacBook Air (Late 2008 or newer)
- Mac mini (Early 2009 or newer)
- Mac Pro (Early 2008 or newer)
In any case if your Mac isn't suitable it won't let you download it, so you should try that first befire considering Lion.
You should be aware that PPC programs (such as AppleWorks) will not run on Lion or above; and some other applications may not be compatible - there is a useful compatibility checklist at http://roaringapps.com/apps:table