Your "theory" matches my reality. I have a BEFW11S4, and the LAN and wireless are bridged. My BEFW11S4 has an address of 192.168.0.2. I have a FreeBSD box at 192.168.0.1 on the LAN side which serves DHCP in the 192.168.0.40-192.168.0.70 range. One machine, with a lease, is connected on the LAN side. The other machines are a mix of laptops and my wife's work-issued WinCE handheld. All of these machines are on the same subnet (whether on LAN or wireless) and see 192.168.0.2 (the BEFW11S4) without a problem.

Would it be possible to power-down your G4 and see if you can get another machine to associate with your BEFW11S4? I haven't a clue what you were using on your G4 to provide access to the other wireless machines, but I suspect that whatever it is is causing the weirdness. Perhaps it's serving DHCP?

Also, if you're using Windows and you get the 169.254.x.x address again, please try a release/renew cycle. In my [limited] experience, Windows will try to continue to use the last address it was issued if it cannot get a new one via DHCP at startup.

I think your first step would be to make sure that your wireless clients are associating with the 802.11b net that your BEFW11S4 is providing. The wireless card status monitors on your clients should tell you what ESSID they are associated with.

BTW, the answers to your questions about the G4 config should be:

IP: 192.168.1.2
Router: 192.168.1.1
DNS: 192.168.1.1
Netmask: 255.255.255.0

If it's connecting to the BEFW11S4's wireless net, then you should be able to ping 192.168.1.1.

Also, have you looked at the LEDs on the far left of the BEFW11S4? They indicate wireless activity.