The best place to find PD-games would be Aminet.
I'm to lazy to explaiun what Aminet is and how you get the games from there to your 1200. I'd recomend that you get an old 2.5 HD (a few hundred megs should do) first.
A CPU-upgrade is not really neccesary if you only plan to use the 1200 for retro-gaming, allthough a RAM expansion would probably be nice.
If you're not planning on putting any money into it, I'd recomend that you find a local Amiga user group and see if they can help you with getting games onto floppies.
BTW, there is plenty of old commercial games that has been released for free on the Internet...
