I would definitely upgrade to 256MB. 128 just won't cut it. If its a tray loading iMac then you'll need to get SODIMMs, but its a slot loading you'll need to get PC133 DIMMs. Either version will hold 256. The tray loading one will may require you to get 2 128MB SODIMMs instead of just one 256MB SODIMM.
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Just FYI, all tray loading iMacs can take up to 512 megs of ram with two 256 meg chips. The only caveat si that the lower slot requires low profile (upper slot can take regular or low profile). Many vendors, such as crucial, only sell low profile ram so its not a problem.
If it was a slot loader, I would hesitate to say the minimum should be 512 megs since ram is so cheap and easy to install for those models. Slot loaders can take up to 1 gig of ram.