This is expected behavior under Mac OS 9. Computers with SCSI CD-ROM drives and ATAPI drives (except ROM-in-RAM computers) play through only when "Internal CD" is selected as the sound input source. Computers with ROM-in-RAM and ATAPI CD ROM drives play through regardless of the sound input source selected in the Sound control panel.
ROM-in-RAM computers are iMac, iBook, PowerBook (Bronze Keyboard and later PowerBook models), Power Macintosh G3 (Blue & White model only), All Power Mac G4 computer models. These are also the computers that happen to have USB built-in.