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.
So long story but please help! I am desperate...
Husband stepped on my macbook (2006) and cracked the screen.
I replaced the screen and the superdrive was damaged so i replaced that too. Also the ram just to be sure. It was incredibly slow but it worked. Then I started having kernel panics again within 3 days. I was having those before my husband stepped on the screen, I have had them before and a HD replacement fixed the problem*2x*. So i rushed out and bought an external drive to try to do a backup and completed that but now my computer is having startup problems. So i startup from the disc and install osx on the external drive and do disk utility repair all permissions and the disk even though it said everything was ok. I did that 4x just to be sure. It wouldn't boot up even after a fresh install. Not being able to backup my info I went out and bought a new HD and installed that today, fresh install of mac osx and it still kernel panics on startup... I try again, 6 hours after installing it and here I am posting on the internet. PLEASE HELP!