One often overlooked source of kernel panics is the airport card. Since the laptop was stepped on, there's a decent chance that the airport card may have been moved and/or damaged. So since you don't seem to have a problem mucking around inside the case, go in and remove the airport card to see if things improve.

You also need to be sure that you are using either the restore discs for your specific unit or a retail OS disc that is newer than what came with your system. So, given yours is a 2006 model if it came with 10.4 then a 10.5 or 10.6 disc would be an adequate substitute for your original restore media. If you try and use a different set of restore discs, for one it should give you an error message when you try and install, but assuming you figure out a way around that, it may not have the necessary hardware support for your system and you'll get kernel panics.

If none of that does it, then you're probably looking at a bad MLB, and should probably cut your losses at this point.