Actually, a 40GB WD Caviar might be a good choice. The added spindle speed doesn't go to waste at all... I've got benchmarks showing a Mac Classic booting faster from a drive with a lower seek time!
You're totally right about saturating the low transfer rate of the controller, but the seek time still makes a huge difference.
The heat concern is real with older drives, but with modern ones with FD bearings, they're cool and quiet; probably moreso than the stock 4500RPM drive.