8.5+ will run fairly poorly unless you have more than 32 megs of RAM, so 7.6.1 or 8.1 is probably going to be the sweet spot for you. On slow PPC machines, 8.5 and 9.1 are noticeably slower than 7.6.1 and 8.1, on a 6100/66 (I know, different platform) 9.1 turns in consistently lower MacBench 4 numbers than 7.6.1, for example. (I'd have to go sign into vtools to check what they are, I don't remember how big the delta was.)
In terms of floppy disks, yes, if you use a version of Mac OS X old enough to read/write HFS, or you use FAT formatting, you should be able to transfer information that way. If you don't have an ethernet dock, then localtalk networking would also work great for a duo. I'm using my 6200 that way.
Faster storage should make the machine feel faster, but it won't really make up for not having enough memory to run newer software and it won't make up for not having L2 cache.