Hmmm... That tray-loader iMac is one of the first computers (ever) to have USB ports, and they are the older 1.1 type, not 2.0. It's possible your much newer USB flash drive draws too much power (or is not compatible in some other way).
Do you have an external USB hard drive, that is the type that has its on power supply (not a "pocket" that is powered by the USB port), and can be erased?
I forgot to mention TWO things, if you format a drive in Mac OS X for use with Mac OS 9. First, when you select (for erasing) something like that flash drive (or an external drive) in the Disk Utility sidebar, you should select the DRIVE in the sidebar, NOT the volume that is indented under the drive. By selecting the drive, the Erase tab will re-partition the drive (as one partition), in addition to re-formatting the volume. If you had selected just the volume in the sidebar, the Erase tab does not re-partition, so in this case, the old Windows partitioning scheme may have remained (and that could be bad for Mac OS 9 trying to access it).
Second, on the Erase tab, there is a checkbox for Install Mac OS 9 Disk Driver. That must be checked for the drive to be readable under Mac OS 9.