The last test you reported (booting with Leopard a Lion Mac) it is obviously failing due to the incompatibility between the Lion Mac hardware and the old OS.
This triggers a couple of thoughts:
1- Have you applied any firmware update to your iMac?
2- What OS X version were you running when the problem started?
If the Mac has a newer firmware it might have issues to run from the old OS X disc.
Once again, the next right step is to format the HDD, and perform a clean install of OS X, doing this with the host Mac.
Anyway it is ahold idea to get a new HDD, their prices are significantly low nowadays in comparison to 3 or 4 years ago.
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The last test you reported (booting with Leopard a Lion Mac) it is obviously failing due to the incompatibility between the Lion Mac hardware and the old OS.
This triggers a couple of thoughts:
1- Have you applied any firmware update to your iMac?
2- What OS X version were you running when the problem started?
If the Mac has a newer firmware it might have issues to run from the old OS X disc.
Once again, the next right step is to format the HDD, and perform a clean install of OS X, doing this with the host Mac.
Anyway it is good idea to get a new HDD, their prices are significantly low nowadays in comparison to 3 or 4 years ago.
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Cross check that these apply for the OS X version that you want to run:
http://support.apple.com/kb/HT1237