crinfante and photomatt, please let us know if the new GPU card resolves your screen freezes -- I also would like a fix that would allow me to sell the iMac in good faith. Unfortunately no more applecare, so I'd have to pay for the card myself.
However, I can report GREAT SUCCESS using KrzysiuTurek's "KEXT" replacement fix in conjunction with running 10.6.8 in 64-bit mode on my 24" iMac 8,1 with ATI Radeon HD 2600 Pro.
For 13 days there have been absolutely no more screen freezes or system hangs. No kernel panics. Prior to replacing the ATI KEXT files, I was getting one to three screen freeze / unresponsive system events almost every day. I'm pretty sure now that the kext replacement has eliminated the problem, but I'll report back it returns!
I'm so grateful to KrzysiuTurek for figuring out this work-around, and to so many of you who tried it and reported back. I was feeling like I'd have to junk this beautiful machine.
This for the benefit of newcomers to the thread:
My machine:
Mac 8,1 (24" Alu iMac, "Early 2008"), 2.8 GHz Core 2 Duo processor, ATI Radeon HD 2600 Pro, running Mac OS X 10.6.8 (latest Snow Leopard). Apple Hardware Test (extended) shows no hardware problems. Ha.
What it did:
At seemingly-random times, the screen would go black, or gray, or striped, or remain "frozen" displaying whatever happened to be on-screen at the time. Sometimes a small snippet of music or sound effect would repeat over and over without stopping. No mouse or keyboard input had any effect. I would have to hold the power button for 10 seconds to completely power off the machine.
What I did:
Set OS X to run in 64 bit mode by using "sudo systemsetup -setkernelbootarchitecture x86_64" (google for more info and to check your machine is capable). Then I followed the instructions here: http://krzysztof-turek.com/apple/ to preplace the 10.6.8 ATI graphics "drivers" with the corresponding versions from 10.6.2. Then rebooted. And no more screen freezes!
According to this discussion thread, replacing the kext files has stopped similar problems for quite a number of people, but also there have been a few (two? more?) who have replaced the GPU graphics card and thereby solved the problem without the kext fix. So it appears to me that this is a hardware problem, and is somehow masked or not triggered by the 10.6.2 ATI kexts but is brought out with any later versions (including Lion, unfortunately). Someone correct me if I'm wrong...