My recording interface was terrible using USB1 also - random noise, squeals, failure etc. on my QSG4. I solved the interface issues (presonus Audiobox) by moving from the stock USB1 to an installed USB2 PCI card. It's been rock solid since. I also had great results using a FW400 cable to (Presonus Firebox), so with your ibook, using the FW400 for an interface sounds like a solid idea. Coming purely from my geeky streak, I think having a partition running an OS9 DAW software environment would be cool. I mean why not, right? I hope iLife04 works better for you.
Good luck
Oddly enough, I had the opposite experience installing versions of OSX on my QSG4. Tiger was sluggish while leopard was much snappier. Granted there is a world of difference between your single 600mhz G3 and the dual 1Ghz of my G4. Anyhow, I hope all goes well for you!