You coul take the drive out and install the OS onto there from another old mac if you have an old mac with a spare bay or an external case for the drive. iFixit has decent take apart instructions for this model if you want to look into it.
- You'll need to do a "Universal" install if you're installing 8.6 or 9.x.
- For OS X, it shouldn't matter since it installs all CPU support for any computer supported by that OS version.
If you're willing to spend a small amount of money, swapping the internal hard drive for something solid state (like a CF or SD adapter) while you've got it apart would probably be worth the time.
Other than that, if you can't get the USB to boot/install as expected, google around (try "open firmware usb boot imac"). There are Open Firmware commands you can use to boot older G3 models from USB. The original Bondi iMac has to be patched this way, but I can't remember if/which clamshell iBooks do.
There's probably a way to netboot/net install the thing over ethernet from an old OS X server, but to me that sounds like a pain if you don't already have OS X Server set up for this somewhere on your network.
Hope this is helpful.
