I wouldn't personally upgrade it. You can get 1.25GHz G4 Minis for £250 or so on ebay. That may be more than you want to spend on a machine for the kids but it'll last far longer and give you less headaches than when your kids start screaming that the rainbow's been spinning for 10 minutes. It might be an idea for Christmas.
My mum has an old 350MHz slot loader that supports up to 1GB Ram I think. It has 384MB in it just now but IMO it is unusable with OS X, which is why she has it
. I had it first, then my brother, then my Mum. She's bottom of the food chain.
I bought a 700MHz G3 ibook after the iMac and then a G4 Mini and I would say that the G4 Mini was very capable of running OS X. I would have even been content to keep using it had Apple not dropped the dual Intel Mini down to under £400.
My Dad got a 1.2 GHz G4 tower off ebay not too long ago for £225 and it runs OS X very well too.
The towers are very easy to upgrade Ram. You can get cheaper G4 towers in the £100-150 range.