Hi! Yes, the 256MB is on the logic board, so once you install the 1GB module, you'll have 1.25GB. All iBooks have some RAM on the logic board (which is both a blessing and a curse, depending on the situation). Because it's integrated, no, you don't have to remove it.
I don't know if you've installed Leopard yet, but hopefully you have at least a 933MHZ laptop, because it won't install on the 800MHZ model due to the system requirements of Leopard.