Software Restore will make your iBook the way it was when you took it out of the box and turned it on the first time.
Applications just includes various apps that came with your iBook (most are probably outdated by now).
OS9 and OSX discs are self-explanatory.
10.2 discs will give you a standard Jaguar install.
Depending on what you want to do, you may want a restore followed by a 10.2 upgrade, or just do a straight 10.2 install as kiazer suggested.