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There is no maximum capacity for hard drives on these models, you just have to make sure it is an IDE drive. If you do want to replace the HDD, you have to be sure that the jumper is set properly. Use the old drive as a reference. Make sure you are careful though, as you can easily pinch cables when you put the dome back on! You will also need thermal paste (VERY VERY IMPORTANT!)

In regards to the games, The Macintosh Garden is a great source. They also have install images for practically every "obsolete" version of OS X. If you need to run OS 9 games, then head over to MacOS9Lives, where they have an OS 9 system folder that will work fine with Classic. One thing is that Leopard does not have Classic support, so you would be limited to Tiger and below. However, you can easily partition the hard drive and install multiple versions of OS X.

Other upgrades I would recommend:
-Bumping the RAM to 2GB
-Installing an SSD (you can put a SATA 2.5" SSD in a G4 iMac with a 2.5"-3.5" adapter, and an IDE to SATA adapter)
 
I have the 17" version of this one and managed to get OS9 to boot natively on it a while back courtesy of macos9lives. That could be something for a rainy day. Especially if the graphics performance has been tweaked since then as that will allow you to play OS9 era games that do not behave well in Classic mode.

Otherwise, get a pair of Apple Pro speakers and you have a nice iTunes player to grace any room.
 
macintoshgarden.org is certainly a good idea. If you install Mac OS X 10.4, you can play any game that is compatible, as well as OS 9 games with Classic. 10.4 Leopard is probably not a good idea for games. It will run slower and there is no Classic environment, so you can't run OS 9 software.
 
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