Q: Resetting my iMac with an awkward situation at hand.

This is going to be a little peculiar as to what exactly is happening but I do hope someone out there can help me out.

Here's an in-depth explanation as to how I've obtained this iMac:

My grandmother is a truck driver, and she has picked up the habit of being a 'dumpster diver', and so just the other day she came across a pile of stuff while she was out and she managed to find this iMac along with a couple of other things that she grabbed. She brought it to me, seeing as she had no real use for it and said I could have it. So, after booting it up and celebrating that there was no damage done to it and it worked properly, I came to the realization that it was used, obviously. So, I am here asking all of you if you know of a way for me to completely restore this iMac to it's original factory settings. I do know the steps that I can take in order to reset it, but I've come in to a problem. Due to the fact that this computer was used, there is already an administrator account created and a password set to it, I've looked around to try and find out how to reset the password and managed to find a way; starting the iMac up through an Mac OS X install disc (which also happen to be with the computer). I've tried this and it never completely loads, it just sits at a gray-ish screen with the loading icon. So, I've done all I can do to attempt to reset it, and now I am here asking all of you if you know what exactly I can do to reset this iMac.

Just incase it's needed, here is the 'About this Mac' information:

Version: 10.3.9

Processor: 1.6 GHz PowerPC G5

Memory: 256 MB DDR SDRAM

Also here is the information on the CD/DVD that was also in the iMac:

Mac Pro

Mac OS version: 10.5.6

Disc version: 1.0