Per Apple (and others, I think), "slot loading drives are not compatible with the iBook G3." But it works in mine now. I just completed this difficult mod yesterday, and since the info was hard to find, I figured I should share it.
The secret is that the iBook G3 has only one ATA bus, so you must have a proper master/slave relationship. I bought a slot-loading DVD/CDRW combo drive (Apple's Model CW-8123-C) on eBay for $26 for this project. Google research told me this model is hard-set to Master, with no jumpers or whatnot. Therefore, I had to set my new hard drive to Slave (might as well upgrade it, too, if you're going that deep into the guts of the iBook).
My iBook is the 12" 800Mhz G3 CD-ROM model, introduced in April of 2003. I don't know if the following is true of all iBooks with this chassis, but this was the real scary part: When I finally got to the internals and disconnected the ATA cable from the old hard drive, I discovered that the wired ATA cable's hard drive connector is extended to cover the 2 left-side jumper pins! The hard drive upgrade I got was the Hitachi Travelstar 5K100, so the jumper setting that cable would have affected would render the new hard drive inoperable.
On this drive, the two right-side pins jumpered equals Slave, and no pins jumpered equals Master. I nearly lost hope after discovering that, but I decided to be brave and broke off the two left-side pins, because I would have only needed them for Cable Select mode. This allowed the ATA cable to connect without modifying the jumpers, and I was able to set the hard drive to Slave, and it worked. Now I have a clean install of Panther and OS 9.2 working fine on it, plus a nifty DVD player and CD burner.
One catch is that you can get stuck booting to CDs with the optical drive as Master, so you must be mindful to use the Startup Disk control panel to select your hard drive afterward.
So my recommended method for this mod is to take a careful look at the jumper settings of your hard drive and prospective slot-loader optical drive by Google'ing their manufacturer part numbers before making any purchases. Keep in mind that the ATA connector may jumper your hard drive's two left-side pins, so find out what that would do. You will then know if you will need to break off those pins (like me), or choose a different optical drive that's set to the opposite Master/Slave respectively. The bottom line is that one drive must be Master and the other must be Slave.
This is a difficult mod, like I said at the top, and it's not for the novice. It took me 3.5 hours, but that included figuring out all that mess above. I used the great guide provided by iFixit for the disassemly work.
Mac OS X Hints
http://hints.macworld.com/article.php?story=20060329123602853