Your maximum OS is Leopard, but that's pushing it, I usually follow the n-1 rule, so run Tiger. Leopard will be slow, sluggish, and unresponsive, Tiger will be responsive and quick (for the specs).
To max out the RAM, get two [product|IF111-017|512 MB sticks], and follow [guide|178|this guide], to max out the hard drive get this [product|IF107-069|5400RPM 320GB HDD], and follow [guide|189|this guide].
As for software, I suggest browsing the web with Firefox over Safari, as it's a lot more stable and responsive on older hw.