There is nothing wrong with the comptuer. The expansion bay CD-ROM drive does not support Target Disk Mode. An external CD-ROM drive can be used in the SCSI chain with the appropriate termination.
For more information on SCSI/Target Disk Mode, please see the following Tech Info Library articles:
Article 19088: "
PowerBook: Miscellaneous Frequently Asked Questions"
Article 13611: "
PowerBook: Using SCSI Devices"