I just loaded 10.5.5 on my 12" and it runs fine. I would say it is noticeably snappier, but that is relative given how much those poor machines suffer with only 1.25 gigs of ram.
I would recommend doing a clean install rather than an archive and install.
There are some smoking deals on last generation macbook pros. Do not get a plastic macbook, they are fragile, particularly the white ones -- the black ones use a different plastic. Flame me if you want, but apple replaced my top plate every 90 days without fail.
I'm not sure if this would buy you anything, but I'm hearing a lot of people are starting to convert the 12" powerbooks to run Linux. I'm not sure what you are using for software, but if you are trying to save the expense of Office, Bean is free (and excellent), the current Apple iWork is fantastic and only $80. Do not put the current Office on a G4.