Lion requires 2GB (and 4GB would be better). Once you've upgraded, you should be okay, but I'd recommend a clean install to avoid any compatibility issues. I upgraded a colleague's late 2006 MacBook from Tiger (running with 512MB of RAM ) to Lion and it was not 100% smooth, with some programs having problems after being migrated.
I realize that I need to upgrade the RAM to 2GB (possibly to 4GB with 3GB actually addressable).
My question is really about how to upgrade the OS. From what I've been reading the bootable thumb drive seems like the way to go.
Since I have a MBA, I was hoping I could leverage it to create the thumb drive. Its currently on Mountain Lion (I know the mini will only support Lion) but I'm hoping there is a way to leverage it since it was originally bought with Lion itself.