The maximum OS you can run is Leopard (10.5.8), however I recommend running Tiger (10.4.11), because Leopard would be a real drag and incredibly slow, with bad performance.
I would also suggest maxing out the RAM, which you can do at 1152MB, however due to slot configuration, the best you can do is settle at 1.0 GB (1000 or 1024 MB), you could put something in the other slot, but it would not be detected, you can get [http://www.ifixit.com/Apple-Parts/PC2700-1-GB-RAM-Chip/IF111-021|this stick here].
As for the OS, you can get it pretty easily on eBay or Amazon, such as [http://www.amazon.com/gp/offer-listing/B0002G71T0/ref=dp_olp_used?ie=UTF8&qid=1275423538&sr=1-1&condition=used|right here], however if you google around there are plenty of Macintosh sites and sellers that have whole archives of every install Disk and will sell to you for a good price.