Hello,
I am having the EXACT same problem with my iBook and a Toshiba 60 gb hard drive. Here is what I have narrowed it down to:
Incompatible IDE drive.
I know it sounds weird. I thought a 2.5" IDE was a 2.5" IDE, but, apparently Apple and this iBook think differently. One thing I did, that I didn't see you do, was to connect the drive externally through USB onto my Quicksilver. The drive mounts and reads properly. I then formatted it and re-installed it into the iBook. Still no joy! I even did a number of firmware commands (setenv) to try and force the iBook to boot only from the CD drive and ignore the hdd. This also failed. I began to think I had fried my Logic Board, so I re-installed the 20 gb hdd I took out, and, "VOILA!", it booted just fine.
Ergo:
INCOMPATIBILITY WITH HARD DRIVE!!!
Look for a western Digital or Maxtor 2.5" IDE to go into your iBook. These are the 2 companies that supplied the O.E. Apple hdds, and I suspect there will be no trouble putting them in there. I am going to be doing this today, so I will let you know my results.