Is this a Late 2009 iMac? I have this iMac as well as an Early 2011 MBP. It seems as if it took Apple about 18 months to modify the slot drive on newer iMacs that now have less sharp aluminum edges as well as an improved inner sleeve similar to my MBP. Prior to that much needed modification, whenever I complained about discs getting scratched, the Apple Store staff always played dumb like they never heard of this! The slot is so sharp and if a disc isn't pulled out exactly perfectly - SCRATCH!
I thought this issue went away with the 2011 refresh. The edges of the aluminum exterior slot are now smoother and there's a better inside guide similar to the multimedia card guide below. My Late 2009 iMac has aluminum edges that are very sharp (unlike my Early 2011 MBP) and a minimal inside guide so if the CD or DVD is pulled out at the slightest angle, the aluminum edge will scratch the discs. It wasn't the optical drive's issue but rather than iMac design.
With regard to the scratched disk, try an Apple store to plead your case and show them the disk. If you get no satisfaction, you may find some help at a DVD rental store that has a grinder/polisher used to clean up rental disks. DVDs are not like vinyl records. The side you see scratched is NOT where the data resides and can be polished to reduce the diffractive problem to where the laser can read through the glass to the TOP of the disk where the 0s and 1s actually reside. Keep in mind, if you scratch the top of the disk down to the surface under the printing, you really have destroyed the disk.
If your installer disk does work, insert it in the drive and make a Disk Image of contents. Once you have the image, mount the Disk Image on the desktop and do your install from there. It will go 10x or more faster.
When you are finished, move the image to an external firewire or USB drive then put the drive on a shelf for the next install. (I've done this for all my main install disks - Final Cut Studio, other audio apps, OSX disks) and it makes reinstallation MUCH easier without any danger of damaging the original DVDs.