Flashing ? question mark/picasso folder...nothing seems to work

Have an iBook dual USB that I have had for about 5 1/2 years now. A little over a week ago it suddenly froze while browsing the net. I could not force quit the App, and the whole machine seemed frozen except that the mouse pointer would move around the screen. So I forced it to power down by holding down the power button. When I tried to boot up after that incident, I got the infamous flashing ?/picasso folder. I tried to boot from a CD...You can hear the CD spin up but the screen stays grey and eventually goes to ?/picasso. I tried reseting the PRAM. I tried resetting in open firmware. I tried resetting the PMU with the reset button on the side. Nothing worked.
So...I left the machine unplugged with no battery over night, and the next day PRESTO! It started normally. I immediately backed up all my info. I thought that maybe because one of the little rubber "bumpers" that cushion the screen when it is closed is partially missing that maybe the mouse button was being pushed to hard causing the problem. So I was gentle with it.
Now a week later, I am having the same problem. This time I let it sit for 2 days, and it started fine. I ran the diagnostic disc that came with the 'puter, and it says that all is well. So I ran the TechTool Deluxe (with current update) that came with my Applecare. It said all was well. So I figured I would reformat the Disc and load everything from scratch. The format went fine. But when I put the software restore disc in and booted from it, it would not allow me to choose the newly formatted hard drive. So I figured, "OK, I'll try loading OS 9 first, then come back". So I rebooted with the OS 9 install disc (the one that came with the iBook), and I am back to the oh so familiar ?/picasso syndrome. Again I have tried the PRAM reset, etc. to no avail.
I have let it sit over night with no luck.
Any suggestions?
Thanks in advance for your help.

Can you please check out the list of iBook models here:
http://www.everymac.com/systems/apple/ibook/index-ibook.html
and tell us exactly which one it is? You can click on each model to see the exact specs for each.
Also, can you tell us which Software Restore CDs came with it (what CDs are included)? Which version of OS X came with it? Which version of OS X were you running when the trouble started and which version are you wanting to install on it eventually (if you want to upgrade the OS)?
Do you know about _Startup Manager_? You may be able to use it to start up from the CD when holding down the c key doesn't work.
Links to instructions for restoring the software can be found in this Apple Knowledge Base article:
http://docs.info.apple.com/article.html?artnum=61802

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