Hello again,
Before you continue, take another look at the contents of the hard disk. There may be documents, photos et cetera that you want to save. If so, you could copy the files to a USB flash drive for a transfer to another computer for backup purposes.
Then, start up from the CD containing Drive Setup while holding down the C key. Make sure that the iBook has started from the CD, not the hard disk (the hard disk should not be top right any more). Launch the Drive Setup application.
Next, select the iBook's hard drive from the List of Drives. Look for a Functions menu (in the menu bar). Choose Initialization Options. Select Zero all data (this will overwrite everything). Click OK. Choose to Initialize the selected drive. Check the progress. Once the process is finished, the hard disk should be completely empty. Double-check this. You may want to repeat the procedure once or twice.
Depending upon the exact Drive Setup version, the above may be slightly different.
Finally, you could use the Installer on the CD to install a fresh system onto the empty iBook hard disk. Check that everything looks OK.
By the way, an iBook without a hard drive would have a lower market value. It could stlll be of interest. However, if you decide to open the computer and remove the hard drive, you also run the risk of damaging parts inside. Removing the hard drive from a Clamshell iBook is not without complication.
Good luck!