Mac book Crashed - can only get folder with Question mark on it My Macbook for what ever reason has decided to just give me a flashing folder with a question mark on it.

I have tried restarting holding the Apple key and R - Nothing. I have also tried holding the ALT key on bootup but it just gives me an arrow curser and nothing else.

I am not sure if the hard drive is even bootable. I do not have a OS Disc.
I have downloaded a DMG file off the internet to my Pen Drive. I assumed incorrectly the OS would boot from my Pen Drive - it does not.
I have cable internet if needed.
I have Windows 7 Ultimate  which I can connect to the internet from, and I have an iPad if that would help.
This icon means that your Mac can't find a bootable disk.  Your iPad definitely won't help; your pen drive, internet access, and Win7 disc might or might not help.

Based on the model number that you've given, you have a white MacBook from 2006.  That means that the OS that came with it was probably 10.4 ("Tiger").  It could also have either 10.5 ("Leopard") or 10.6 ("Snow Leopard") on it if it was upgraded at some point during its lifetime.  This MacBook cannot support anything later than 10.6 (it will not work with either 10.7 "Lion" or 10.8 "Mountain Lion").  This laptop is long out of warranty.  If you are close to an Apple Store, since it appears that you don't have a lot of experience with Macs, you could try to schedule an appointment at their Genius Bar and see if they're willing to help you out.  They'll probably be willing to run the necessary diagnostics to see whether you're experiencing a major hardware failure, such as a failed hard disk.  However, if you have a piece of failed hardware, their cost to fix it is probably going to be more than the cost of buying a working Mac of a similar vintage.  If it is a piece of failed hardware and you're comfortable replacing the hardware on your own, I've found that Other World Computing has good prices for replacement parts, and they also include excellent step-by-step instructions for doing the replacement.  If it's not failed hardware, they might or might not be willing to help you get a new OS installed.  It doesn't hurt to ask. 

You say that you've downloaded a DMG file off of the Internet, but I don't know what DMG file you have.  You need a bootable version of either 10.4, 10.5, or 10.6.  You can buy physical DVDs for each of these off of Amazon or other sources.  You can't use the installation discs from another MacBook to install the OS onto your MacBook (unless it's the exact same model as your MacBook).  To install from a DVD, you'll either need the installation discs from an identical MacBook, or the retail DVD (which is what you'll find on Amazon).  Once you have the DVD, put it in your drive and hold down the C key when you power up the MacBook.  If the installation starts, then you're probably going to be okay.  Go through the installation steps for the OS.  If you run into trouble during installation, Apple has some excellent installation troubleshooting steps.

If you don't want to run OS X on this laptop, you could just use it to run Windows.  The specifications are better than the minimum specifications to run Windows 7, so you could just use that.  There's an extensive set of instructions for installing Win7 on a MacBook Air, which should work for your MacBook too.  Those instructions go through the whole process in detail, from creating a bootable USB drive (which will require access to a Windows computer) to installing it on your Mac.