Neither one of you has said whether everything is peachy when you try any of this with extensions off.
From experience with powerbooks, and g3 machines in general, the use of ATI extensions is just plain ugly. It's very hit and miss with what works where. I have a b/w that will only function while running the ATI extensions directly from ATI. You know, the one's we're not supposed to use?
Try disabling some of the Apple included extensions on a fresh system folder, too. You may be surprised.
Also, follow websites' forums and discussions on OS9. This could very well be the root of the problem. If your machine is having troubles with the the Open Transport or the Multiuser abilities, these are things that happen upon returning from sleep. You may not be the only folks with such a problem with the new OS, and your problem should be voiced to the masses.