Upgrade to 4gb of RAM and this machine will run fine and be pretty fast even by today's standards. The limiting factor for speed after upgrading RAM is the 5400 rpm hard drive. The Core 2 duo Penryn processor is pretty solid.
I recently made the decision to pass up selling this macbook and buying a MBP and opted instead to purchase an SSD to replace the 5400. I figure this machine won't be outdated for at least another 2 years time, at which point I'll look into purchasing the newest MBP.
The SSDs are not cheap though, I paid $299 for Intel 320 160GB. My current HD is the same size and I'm able to fit everything on here pretty easy. Keep movies, photos, and some music files on external.
I think I'll regret my decision if SSD prices drop significantly within the next year, otherwise, meh, I'll try to justify somehow.
Tangent aside, yes it will run Lion, but Snow Leopard is fine imo.