You should verify that you have the latest firmware, before installing new software. See the system profiler for details. What firmware do you need?
http://docs.info.apple.com/article.html?artnum=86117
You may run Mac OS 10.3 on this machine. Mac OS X takes about 4gig. You can trim it down to 3gig with a custom install.
This will require a minimum of 128meg of ram. More is better. I'd suggest 256. You may put 512meg of ram in this machine. There are two memory slots. One must be Low Profile memory. Be sure you can return your memory cards. iMac memory cards are finicky.
http://eshop.macsales.com/shop/memory/iMac-G3-G4/
All the tray loading iMac g3's, models a-d, are constructed the same.
While this article deals with adding memory, you should see the pram battery on the logic board when you get to step 17.
http://docs.info.apple.com/article.html?artnum=43012
You should skip steps 17 to 20. Look for the pram battery instead.
http://docs.info.apple.com/article.html?artnum=43013
Here is a good disassembly page:
http://www.macopz.com/columns/imacrepair/disassembly.html
The second article in this series has information on replacing the battery:
http://discussions.apple.com/thread.jspa?messageID=2584291
How To Upgrade Your iMac
http://www.djonmac.com/
The tray loading iMac requires the boot partition to be within 8gig. Since there are hidden partitions before the first visible partition, people recommend that you make the first visible partition 7.5 gig to 7.9gig. The machines support upto a 128gig Parallel ATA drive.
You should be able to use Unix symbolic links to 'move' some directory like /Users to the second visible partition.
Robert