Had to edit much of the thread... But on the topic of installing the dmg on a Mac without DVD drive (or a non-bootable USB DVD drive):
If the Mac has a FireWire port, you can try and install using another machine, hooking your iMac up via FW in Target Mode (boot with Apple-T held down), so it mounts as a harddrive on the DVD-enabled Mac.
One other way is to simply mount the .dmg and find the Installer.mpkg on it. This way, you can update, as long as you're not booted into the system you want to update, i.e. you need at least two volumes with an installed Mac OS X.