Grey Screen, won't boot from usb. Only have a PC to create a boot USB. How can I reinstall OSX with a .dmg file?

Question

I recently recieved a macbook that I was told was broken. She didn't know what was wrong with it, but she told me I could keep it if I wanted to get it working again. Its http://support.apple.com/kb/sp579 this model. I got the laptop to power on, but the apple logo and the spinning wheel under it kept spinning forever. So with me and my "Amazing" knowledge of Macs, I thought it would be best to reformat the drive on my PC via sata cable to FAT32 (which I was told is a format that mac devices can read/write on) and install OSX from usb. So I have a .dmg file and used TransMac to format the usb and make the usb drive bootable with the .dmg.
I formatted the drive to FAT32 and plugged it into my macbook and I get a folder and a question mark blinking on the screen. After looking at some forums online, I found that the error occurs when you don't have the correct filesystem to boot or something along those lines. So I try rebooting the computer while holding C, to boot from an external device (such as USB). Nothing. Again the folder and question mark blink on the screen. I look at some other boot option keys and try all of them. Shift for recovery mode, D for apple hardware test, Control, option, P, and R for resetting NVRAM and PRAM. Everything! The only things that differ slightly are when I press Option for startup manager, N for NetBoot and Option+N for internet default boot image. When I press N and Option+N, I get a blinking globe for about 5-10 seconds and then the folder and ? blink again. When I hold Option for the startup manager, I get a white screen and my curser, which I can move around the screen, but there is nothing to click on, its just white.
Currently I have a USB flash drive plugged into the macbook with a .dmg OSX installer on it via TransMac and for some reason, my macbook doesn't want to try to load it. Either I have the wrong file format for the installer, or my macbook is having problems. I read that the hard drive may be the problem, except I can use it on my PC so I know that it works fine.
If anyone has any information about how to fix this, or any ideas. Please let me know! I would very much like to get this macbook going again.

Answer 1

The correct format for Mac OS X is not FAT-32.
As the computer shipped with an install-restore disc DVD set that could be used to start the computer as an emergency disc and use the Utilities on the Installer, without running the Installer itself, to format, attempt repair, and perform a few different system installs or reinstalls, this is where the correct format would come from.
Was there documentation to confirm the build year and model information, such as to refer you to the product page link you posted above?
If accurate, that MacBook shipped with this custom grey
install-restore DVD version of Snow Leopard:
Original OS
Mac OS X 10.6.1 (10A2047)
Maximum OS
Latest release of OS X
AirDrop
Supported
Hardware Test
AHT 3A181
And to be able to restore the basic OS X to that level, official replacement discs for that computer should be ordered from AppleCare; to facilitiate obtaining correct ones, you should find the product serial number. There likely would be a fee involved. The replacement disc set may have a different number than the one in the information box above, but would match the hardware series by Apple standards. And a replacement disc may not have the original extra applications that shipped with the computer when new. Those original discs are part of the retail computer, an essential part number, like the power adapter, and should be included with the computer even after an OS X upgrade, since they allow basic access without using the internet.
The remainder of the Snow Leopard 10.6(.8) would be a download Software Update Combo v 10.6.8, either direct from Apple servers or through the computer's running Software Update. Once the computer is up to date in Snow Leopard, 10.6.8, then one could visit the Mac App Store, App Store, and iTunes Store; from the Mac App Store, and you could check/get the latest upgrade to Mac OS X, 10.9.2. An Apple ID is required to access.
The computer may not support Mavericks 10.9.2, or may be able to, but could use an upgrade of RAM capacity.
If your model and build year series info is correct:
Maximum Memory
8.0 GB (Actual) 4.0 GB (Apple)
Memory Slots
2 - 204-pin PC3-8500 (1066MHz) DDR3 SO-DIMM
For more information see the database download http://mactracker.ca
and also compare specs with macbook models at everymac.com.
The newer OS X systems that can use a Recovery HD partition on the hard disk drive, can start from there to repair their hard disk drive, and reformat the section where the Mac OS X runs, and reinstall that. Since there is no likelihood of that still being on the drive once it was FAT-32 reformatted, it will not be present to assist in attempts to reformat the drive; if the computer had been upgraded past Snow Leopard 10.6, to a later system that would have used the recovery partition, or the later internet recovery system. That goes to Apple Servers to use OS X Utilities and reinstall the system, helpful for computers without optical drives or system media. Your MacBook with 10.6.8 installed, then had to access the Mac App Store, to get 10.7.5, 10.8.5, or 10.9.x
Identify your Mac lookup by model number or serial number:
https://www.powerbookmedic.com/identify-mac-serial.php
Anyway, the hardware in the computer may need some inspection, troubleshooting, and maybe repair; but the original DVD install-restore disc has an Apple Hardware Test on it, for that series build model macbook. That could help in troubleshooting some aspects of the computer. Could be the hard disk drive failed; or if someone tried to upgrade the RAM, the system may not have worked correctly. Hard to say how it was messed up, at this stage. There are several possible causes.
Hopefully you can get the correct disc set from AppleCare.
You can call Support number, or use Contact Support page.
Good luck & happy computing!