If you put the disk in, restart and hold down the option key, do you see any more icons now? You should actually see three hard drive icons (one for your internal hard drive, one for the Mac OS X installer and one for the Hardware Test) and then the "rescan" button and the "continue" button. If you're only seeing one icon, that of your internal hard drive, then it seems that startup disk may not be the correct install disk for your iBook, there's something wrong with your disk or there's something wrong with your optical drive.
-Doug