Have you tried booting the imac as a target disk via a firewire cable to another mac and mounting the disk that way? You have to hold down the T key when booting the imac.

If you can get the iMac HD mounted on the desktop you can install onto it. You could also try it the other way round and try and get the iMac to boot off another mac in Target disk mode.

The flashing question mark, as I'm sure you're aware, is the system telling you it can't find a system to boot from. If it had a flashing X it's telling you it can't find a bootable device with a system on it. So it's seeing the HD, it just can't see the system to boot from, presumably because you formatted or erased it. But why it won't boot from a known good CD is a mystery. If the machine can't see a System to boot from on the internal drive it'll look to the CD Rom drive next for one.

Yet the hardware test shows the CD Rom as good and the System CD's are known to be good too.

My next step would be to check and confirm these knowns, by opening up the machine and reseating the connections to the CD Rom. If I had the facility I'd also pull the CD Rom and check it works by putting it in a different machine. I'd want to know for a certainty that CD Rom was working.

Because if it was working correctly - it would boot those install CD's if they're known to be good.

You did reset the PMU from the switch in the base of the unit yes?