Well, I'm more familiar with the "slot machines" but I think I can help.
First, ask yourself how badly you want to upgrade this machine. Adding hardware like RAM and a larger hard drive (almost a necessity for running OSX) is one expense, but getting older versions of system software is getting pricey and difficult. It's easy to drop $200+ into a $25 computer and end up with a $35 computer.
First, avail yourself of the excellent information on this Apple support page:
http://www.apple.com/support/imac/g3/
Lots of useful links there.
To install OSX 10.2.X or higher, you must update the firmware and, according to this article:
http://docs.info.apple.com/article.html?artnum=75430
you must have at least OS9.1 to use the updater. Another expense.
The TL iMacs cannot support a Mac OX greater than 10.3.9 so don't run out and buy a copy of Tiger or Leopard.
You need more RAM, even if you don't upgrade the OS. The Tray-loader takes notebook RAM and has two slots. However, only one is readily accessible; the second requires some disassembly and is should not be attempted if you're not comfortable inside a computer and have not observed the safety procedure for avoiding hi-voltage hazards inherent to all-in-one computers.
RAM installation is detailed here:
http://www.transintl.com/technotes/installram_imac.htm
If the user-accessible slot is empty, the most RAM you can install without taking things apart is 288MB (a new 256MB stick in the top slot and leaving the factory 32MB stick in the bottom). Slim for OSX to me. Accesing the lower slot and putting another 256MB there would give you the machine's max RAM of 512MB. Not a bad number but it will cost you about US$70 or more.
I believe info on upgrading the hard drive is on the same site. Poke around and you should find it. If you plan to run OSX, I consider a 40G hard drive to be the minimum. You should be able to install a drive up to 120G; this machine will not support anything larger.
Again, the tray-loaders are not my long suite. I hope spudnutty or other with more TL experience can jump in.
Allan