Once I knew what I was doing, everything was simple.
Here are the steps for the G1:
1. Update recovery image (Optional but recommended)
a. download the cyanogenmod recovery image and place it in your SDcard.
b. open up terminal and type
mount -o rw,remount -t yaffs2 /dev/block/mtdblock3 /system
flash_image recovery /sdcard/cm-recovery-1.4.img
cat cm-recovery-1.4.img > /system/recovery.img
2. Update cupcake to donut
a. download the 1.6 image here and place it in the sdcard
b. download the mod image here and place it in the sdcard
c. turn off phone
d. boot into recovery mode by pressing home + power
e. from the recovery menu you can select nandroid to backup for safety (optional)
f. alt+ w to wipe (optional)
g. alt + a to apply, first select the 1.6 image and let it complete
h. Do not restart!
i. alt + a to apply, select the cyanogemod image and let it complete