HELP Computer ran slow, tried archive install, won't stop restarting...

Let me explain.

My iMac 2.8 intel dual core, 2 gb ram, stock nothing has been done to it, only year old. It began to lag and lock up a lot. For example downloading a torrent would lock up until it finished. Watching videos on VLC would freeze towards the end or video stopped and sound continued on till it froze. I was limited to editing 1 photoshop file at a time and for a limited amount of time before the system began to freeze up. The general performance was slow and laggy at best. So I took these steps to TRY to fix it.

1st
I was down to about 12 gb of free space so I deleted some videos and had a nice 50 gb available. Not better.

2nd
I tried to back up my data, but transferring these files to a external hdd would lock up and certain files in folders in folders in folders wouldn't transfer. I hope you get my drift and with 250 of 300 gb used I couldn't do files 1 by 1 to find these certain files that for some reason didnt transfer. If i recall it was -32 error or something?! So not better.

3rd
I wanted to reinstall os x anyway after I backed up. But since I couldn't back up I decided to do archive and install. I used my mac os x disc 1 that came with the computer selected archive and install, installed os x again no problem. Once os x finished, it restarted, then restarted, then restarted. Still not better

4th
I tried to reset pram. Still restarting

5th
I entered disk utility and repaired hdd then repaired disk. Still restarting.

6th
I started to worry cause I don't have a back up of my pictures and I need this. I see through disk utility that the data is still taking up space. So i decided to try and use the restore option to create a copy on this external hdd. Instead I got this error "restore failure could not restore input/output error".

7th
I came here for your help.

My main concern is getting my data intact of course.

My second concern is what cause this imac to slow down so drastically.

I wasn't sure if i could do another install of os x since its probably already created the old system folder. I really need help on what to do next to keep my data and get the imac to load.

 

OK I feel like a total idiot.

So I had a quick thought before I slept. Maybe if i install os x on this external HDD using my powerbook. I could boot the imac through the external hdd and access the files to copy them over then do a fresh os x install and erase everything. (Would this even work) So i turned on the imac one last time to eject the dvd. I take it out and decided to let it run and finally it loads! But it all looks the same. My icons, my desktop folders, etc. But most of all its still running slow as ****. It did create a previous systems folder but not really much inside it. Especially not my files cause I looks like I didnt do anything.

So what's my best corse of actions. Another Archive and install? Try to transfer these files and clean OS X install? Boot from external and access internal HDD that way to copy then clean OS X install?

I just have doubts ill transfering everything smoothly in this current laggy situation.

Thanks.