OK, you can detach the display and use the unit as a headless desktop. The powerbook doesn't care too much if the internal display is connected or not, though I guess it might restrict the allowed resolutions slightly on the external. The LVDS cable which supplies the picture information also tells the powerbook about the display, so disconnecting it will make the display undetectable. The other cables running through the hinges are both two pin cables, one for the backlight and one for the sleep LED.

As long as you have heatsinks in proper contact with the CPU and GPU, you can mount the guts in pretty much any case you like. You may find some innocuous looking connections, components or screws also act to earth things, but there shouldn't be too many and most of them are for earthing the shielding on cables.
The machine will happily run without its battery as it is so if you don't want it, don't use it.

You can add full size drives if you want to using readily available adaptors from eBay. You will need something to power them though. These are also available, I know they come with the USB to IDE/SATA adaptors which can be bought for $25 or so. Alternatively, you could run big external drives from firewire, there should be plenty of room in something like an ATX case.
The power button is connected to the logic board by a two-pin cable which can be easily extendedto a button on the front of the case.

When you say the display is defective, is it cracked? There aren't too many of these panels which fail without being cracked or suffering from a failed backlight. It may be that the internal video output has failed on your logic board, or it may be a problem with the LVDS cable.
Ignoring that, if you want to mount the thing in a bigger case, you might be able to make good use of the backlight. If you put a window in the case, you could use the backlight to illuminate it. It will work fine if you remove the backlight from the display, but I don't advise this since the backlight contains mercury and if you break it, you could poison yourself. Nasty stuff.