Thanks for all the replies.
I ended up erasing and formatting my built-in HDD in my Macbook Pro and then installed a fresh clean copy of OSX Lion from a USB stick. After the OS installed, it asked me if I wanted to bring any data in and gave me the choice of the Time Machine backup which I chose and then plugged in my HDD. 3 hours later and I was back up and running again, just had to do a few updates.
Everything runs much faster now.
It seems like I need to do this every year or two. I guess it's the defragmentation of the HDD that does this, that's all I can figure.
Side note, is it better to run Final Cut Pro X on an external HDD? I only have a 5400 RPM HDD that came stock with my MBP, and I have an external 5400 RPM HDD as well. 4GB of RAM. No money to upgrade RAM or HDD right now, so I am trying to do with what I have for now.