Q: 2008 iMac running very slow

Every re-iteration of OS X takes more CPU, GPU, RAM and HD resources.

Your iMac can take 6 GBs of RAM Max.

I noted your updated to 10.7 Lion.

4 GBs of RAM using Lion or Mountain Lion just isn't going to cut it any longer.

Especially if your are running a lot of concurrently.

Put in the last 2 GBs of RAM in to your iMac.

It should help with many of your issues.

You can purchase RAM from reliable, online sources like crucial memory or OWC

Here are the RAM specs for your iMac.

Memory Slots     2 - 200-pin PC2-6400 (800MHz) DDR2 SO-DIMM

I would try and see if you can increase that free space on your HD.

Try and deleted any applications you no longer use, go through your documents folder, email and see if there is anything that is, basically, useless data that you can erase. Archive or delete old emails, delete old Read Me files and other types of useless docs.

I would download the app called OnyX

Install it and let it run the initial disk diagnostics, the run the routines under maintenance and cleaning tabs.

This app will get rid of a lot of useless junk like system cache files, user cache files, web browser cache files, log files, etc.

Also, if you can still find this app, run a program called de-localizer.

This app erases all language localizations except the one that your Mac uses.

You can specify which languages you want to delete or keep.

You can gain an extra  GB or so just by removing language localizations that aren't being used.

First thing I would do is to run the Apple hardware test. You'll need the original OS X disks that came with your system. When prompted, choose the extended test, which can take awhile to complete.

Next, I would download and run SMART Utility on your internal hard drive, to gauge it's health.

I'd also run rember overnight to test the memory. Related to memory, click on the apple on the menu bar and make sure it reports 4GB of memory installed.

If something doesn't check out or there's an error message or issue identified, that will help!

Next, bring up the Activity Monitor (on your hard drive in applications/utilities) and click on the system memory tab. Look at page ins and page outs (which reset on reboot). If page outs is 10% to 15% or more of page ins, you can use more memory for what you run. When OS X is using all the memory, and it needs more physical memory for another program, it will write memory to the hard drive (the page out). Too much of this can really impact performance.

Make sure that any login items (listed under users in System Preferences) are compatible with Lion. Having a downlevel program can cause slow downs. Also, at the bottom of the System Preferences pane may be other programs listed, ensure they are at a level to run under Lion.

Generally, you're correct that OS X disks don't require defragmentation. However, some applications like movies can really benefit from large chunks of contiguous space being available.  If you want to see if fragmentation is a concern, download the iDefrag demo.

This FAQ will have some other ideas, too.

The OP runs a lot of apps concurrently.

Still think the OP's issues are RAM related.

Realistically, I think the OP is running too many applications concurrently.

I would try a cut back on how many apps you have running concurrently.

OS X, by itself, to work reliably, uses at least 3 GBs and perhaps with the amount of apps you leave up and running use al 4 GBs of RAN just to keep the system barely operational.

And the OP did mention that the HD was low on free space.

130 GBs isn't all the much free space left on a 1 TB drive.

I think some more free space is needed.

I don't think this has anything to do with hardware failing. Just not enough computing resources.

OWC says your model can take 6GB of memory.

It dosen't matter in this case.

You only have two slots.

Use a 4 GB and 2 GB module.

You should be fine.

You can use a 2GB and a 4GB for 6GB of memory. However, you will lose the benefit that the Intel architecture brings when using matched memory, ie 2 x 2GB. In testing, matched memory is worth 3% to 5% better performance. However, if your system is memory constrained, the improvement in operations due to greater memory may outweigh any minor, likely not noticeable, performance loss.