It depends on the kind of password protection you have to work around. Some protections software is disabled easily just by holding down the shift key until you see the message "extensions disabled" on the welcome screen. Many "protection" software available for System 7.6 or earlier is not very secure and can be disabled without too much work. You might connect the harddisk to another Mac as a second drive and remove the protection manually. If you have a protection on disk driver level, like Harddisk Toolkit, again it depends on the version you use. Try to identify the kind of password protection and search the web a little for known issues.
For the set of installation floppies: switch off the computer, put the disk labeled "Install me first" into the disk drive, start the computer and follow the instructions. I preferred running 7.1 on a LCII.