I just updated from 3.16 to 3.17 on my PowerBook without using cd or usb, using this method.

Download the iso file and mount it.
Then copy the MorphOSBoot:mac_ppc32/boot.img file into your Boot: partition.
Reboot (the boot splash screen should now show 3.17)
Mount the iso file again
Open a shell window and type assign sys: MorphOSBoot:
Navigate to the MorphOSBoot:WBstartup folder and launch the installation program (FirstFlight)
Follow the instructions and the install should run just as if you booted from CD.