Depending on the operating system version,which if you are booting with extensions off,is 9.x or lower,it might not even be worth it to troubleshoot, just install a clean copy of Mac OS 10.3 that you can get on ebay for like $25,that way you won't have any issues with whatever the problem is now, All of your friend's info will be gone so you can start fresh,and it will be compatible with many more programs. Apple dropped support for OS9 about 7 years ago now, and near the end of the g4's,they couldn't even boot into OS9 anymore.
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Re: G3 series 1998 notebook
This has always been a tedious problem to solve. The best advice I can give you is to use the law of halves, create an "Extensions Disabled" folder next to the "Extensions" folder. Move half of the extensions into this folder and restart. If that helped put half of them back, if it didn't help, remove half the remaining active ones. By repeating this process you can rather quickly ascertain which is the problem extension with just a few restarts. Say you have 120, then 60, then 30, then 15, then 8, then 4, then 2, then solved. From this example you could deduce the exact culprit from 120 possibles with just eight restarts.
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To restore an iBook G3 to factory settings you need the installation CDs that came with the iBook. Ask your friend to find them. Sometimes you can purchase replacement sets on eBay, but they have to be for your exact model. Please realize that the original installation CDs that came with this iBook will contain OS 9, not OS X, so I question whether you really want to restore this machine "to factory settings." What you may choose to do instead is a "clean install" from a more recent retail OS X CD or DVD.
Your mac doesn't recognize the system folder. Try to find the original boot disks that came with the machine, and see if you can mount the hard disk while booting from the CDs. If you can, I'd backup the data as soon as possible and reinstall the operating system, including a full hard drive reformat. If you can't see the hard drive from the boot cd, another option is to hold down the T key during startup to boot the mac into "target disk mode" - this will allow you to hook up the g3 to another computer as an external hard disk in order to back up the data.
I was going to say you can't go beyond 10.3.9. But I did install 10.4.11 on my Pismo, the last of the black G3 Powerbooks and only one with Firewire--it cannot do 10.5, I think. IIRC 10.4 checks for Firewire. I see a claim on http://discussions.apple.com/ support for a Clamshell G3 running 10.4.11 and iBook should be later. Problems are going to be RAM limit and disk size. You will need to get a retail copy of 10.4.x (should be cheap these days with 10.6 coming, Intel only) and do a normal install but deselect other languages and print drivers and many fonts and use ONYX to clean up. Then you can upgrade by downloads from Apple. You might also be able to clone 10.4 from a friend, like stealing--see Carbon Copy Cloner.
It's probably a problem with the hard drive not being able to be mounted. This can happen when some of the important sectors of the hard drive become corrupted or damaged somehow. The best thing to do is to start with an OS X cd (hold down c after the boot up chime to boot to the CD). When you've done this then cancel the install process and go to tools and use the Disk Utility to repair the drive. I'm guessing that you'll find that it fails because the drive has some serious problems with it.
You can keep trying various stuff, but you'll probably have to reinstall OS X to get it working again.
One thing to try is to use it as a firewire drive (hold T while starting the computer) and then connect it by firewire to another ibook so you can get your Home directory off it and save your data. I'm guessing though that this won't work because the hard drive isn't able to be "mounted" (accessed). Write back if you have more ??s
Has the hard drive been replaced yet? Computer hard drives have a 4 year average life. the last g3 shipped in 2002.................The G3 ibook was also infamous for bad logicboards or separated GPUs. Check
http://www.coreyarnold.org/ibook/ or http://forums.macnn.com/69/mac-notebooks/210232/diy-ibook-dual-usb-logic-board/
! for research only- I take no responsibilty if you turn your failing ibook into a brick or set your block on fire, but I know this technique very well!