Wow, not heard of one on that old a dash for some time.
Please do not update it until you figure out what you want to do -- that machine is capable of being JTAG hacked and that is quite a rare thing these days.
JTAG will cost you xbox live but is probably the best hack otherwise. You can do it very cheaply with a parallel port on a computer and a trip to your local electronics shop. The later hack in RGH may cause issues with certain hardware revisions made around that time.
The only option for USB and xbox live is the ODDE stuff (if you are familiar with the Wii then think WODE). They are quite costly things that sit on your DVD drive and replicate it for the machine and farm things out to to USB. It will not allow for region free, hacked games, homebrew, DLC or XBLA content to be played though. JTAG/RGH allow for USB but live is impossible with JTAG and terribly annoying with RGH, not to mention you can not use the hacks when on live when on RGH so you will need a hacked DVD or something.
For a DVD hack that old you can probably still dump the keys from the drive in a fairly simple manner, some of the later DVD hacks made this harder to get your keys again.
2007 then. Depending upon the age of the system it still means you are likely on one of the older hardware revisions. These are the ones most prone to the red ring of death failure method unfortunately. It is not an easy repair either. If it was a newer hardware revision I would have said even if you want live then JTAG hack it and sell it on, use the money to buy a new 360 and possibly hack that. Being an older version though it will not command the highest price.
What manufacture date is on the back of the system? Alternatively the image on
http://team-xecuter.com/forums/showthread.php?t=76989 should help you identify it.