128 MB would be a fine upgrade for an iMac, especially if you plan to run any version of OS X!
I once had OSX 10.1.4 installed on my Rev. C iMac, which only had 32 MB of RAM, and it was S-L-O-W-!
It took like 10 minutes and tons of disk thrashing just to get to the desktop!
And if you want 8.6, it'd probably be easier to somehow obtain an 8.5 disk (or, even better, an install/restore disk set from a Rev. B or C iMac, which came stock with 8.5), install that, and then run the 8.6 updater. I don't think it'll work straight on 8.1.
Also, to my knowledge, there was no "retail" installer for 8.6, only system-specific ones (Rev. D iMac, very early Slot Loaders and iBooks, PowerBook G3 Lombard, early Sawtooths (I just discovered that apparently, the earliest Sawtooths came stock with 8.5. Can anyone confirm?)). I guess the standard way was to install 8.5 and then run the updater.
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