I appreciate all the replies, but it's not sounding too encouraging. As far as trying a new HD, could I just unplug the internal HD and try to boot without it, instead of having to go out and buy a new HD? In theory, if the HD was the prob, shouldn't I be able to boot from the install DVD wihout the HD connected?
This sure seems like it is worth a try - but I am not sure you can easily get to the hard drive cable to pull it. I'm pretty sure it should boot from the DVD w/o a hard drive connected.
This would help isolate the issue and see if you can get past all the boot errors you are getting.
A while ago, I had a couple of the last model iMac G5 machines that developed logic board problems also. After going through all of the suggestions, including checking for power supply issues, bad capacitor issues, etc, I ended up sending it out to a third party on eBay who did logic board repair. For a couple of hundred bucks they repaired the issue.
I had similar luck with an aluminum Macbook that had water damage. I sent it away and for $300, they fixed the problem, and saved my daughters $1,200 laptop.
Just be careful sending off your computer if it has data on it that you are concerned about - as you obviously are. You should be able to pull the data off the drive with an external drive cable, but w/o another computer to work with, this is going to be tough.
I agree with the others here, that you may not have a logic board issue - it sounds like you are pretty far along in the boot process for that to be the real issue.
That said, the issues I had with the old iMac G5 were somewhat similar, in that it would boot sometimes, and hang other times, and it was determined to be a logic board issue...
If you HAVE to get a new computer, get one of the new Mac Mini's for $599 and put a $100 monitor on it. Use your keyboard and mouse from your iMac, and keep your existing software investment - especially in those Adobe products.
Look for a deal on refurbished ones in the Apple store and you could save even a bit more.
I know that doesn't help if you can't afford it, but it is a heck of a lot cheaper than $1,299 for a new iMac...
Boot the Mac in verbose mode and see how the start up process is happening. Google that Mac OS X verbose mode and give it a try.
You could also try safe mode. That is booting and holding down the SHIFT key. This may bypass loading that parallels kext. here is a description:
http://support.apple.com/kb/HT1564
Single user mode (hold down the S or CMD-S keys) is also worth a try. That would leave you at a prompt and not the finder though. You can type exit or logout to continue. it would be interesting to see if you can get there also.
http://support.apple.com/kb/HT1492
May be a long shot, but it gives us more data points to help troubleshoot...