To make WordPress available at http://mydomain.com just change in Settings->General, the Blog address (URL) to http://mydomain.com and put this index.php file in your web-root folder (it is the same folder that contains the blog folder)
<?php
/* Short and sweet */
define('WP_USE_THEMES', true);
require('./blog/wp-blog-header.php');
?>
Then update your permalinks in Settings->Permalinks.
Ok I altered the Settings->General to the blog name (www.grub-junkie.com)
I created the index.php file as you listed but created it in the "html" area of the file manager tree. Went to the website and a bunch of errors showed up..
I deleted the file and drilled into the "wordp" folder, and there is another index.php file in there with similar information that you listed.
I have a feeling based on another users forum post that I am to delete something in the html folder. I have the following files in there.
.htaccess
favicon.ico
gdform.php
missing.html
webformmailer.php
welcome.html
I assume the gdform.php should be deleted.
I also have three other folders with assorted files in them.
db_backups
php_uploads
wordp
I just changed the permalinks to look nicer by deviating from the default. Hopefully that's that you were talking about when you said to update them.