Greetings Doppie1200!
Dont bother trying to patch OS3.1 youll fill your harddrive trying to make this acient version anything descesnt! You should upgrade directly to OS3.9 but you will need a CDRom for this!
Check
http://www.haage-partner.de/aos39/index-e.html for Info.
Your 3.1 ROMs are the latest ROMs that can be bought so your OK there
An 060 is deffinitly your best bet to upgrade you processing power with as its the fatest 68K you can get for your 1200! It will help with MP3s and 3D stuff but you will be let down by the AGA chipset and its measily 2MB Ram.
If your looking for a cheap 060 check out EBay or
http://www.amibench.org for second hand hardware.
If I were you I would seriously consider getting a tower as this allows you to expand your 1200 to take advantage of "Powerfull" graphicscards (such as a Voodoo3 3000 16MB) Via PCI slots as well a descent Sound Cards (Soundblaster 128) 100MBit Network Cards and MP3 Hardware decoder Cards. A Graphics Card and An MP3 Decoder card will free you from the SLOW AGA Graphics and Sound (8Bit by the way)chipset and free up lots of you CPU cycles to do a lot more work by taking the load off your processor!
It will then allow you to easily add a 3.5" Harddrive (less expensive than a 2.5" laptop model and add a CDRom!!!
PM me if you need any advice
Thanks
Mark