Yellow, I don't want to invest money in this machine, but do you honestly think that adding more ram would help the iBook play videos properly?.
Tiger is a VERY processor intensive OS. And that means it'll run slowly on the G3. And 512MB of RAM is really the decent minimum to run Tiger. Unfortunately, you're running well below that, which means the OS has to use swap constantly, and you have a slow HD in your iBook (4200RPM most likely), which further slows everything down.
More RAM will make a big difference to repsone, uptime, and speed of opening applicaitons, but ultimately your speed issues are all in the slowness of the G3 processor and the massive overhead that Tiger requires.
And again.. no, you cannot strip down OS X. Unlike Windows XP, OS X doesn't have services turned on that you don't need. So there's nothing to strip down for speed.