Reinstall OS X without erasing the drive
1. Repair the Hard Drive and Permissions
Boot from your Snow Leopard Installer disc. After the installer loads select your language and click on the Continue button. When the menu bar appears select Disk Utility from the Utilities menu. After DU loads select your hard drive entry (mfgr.'s ID and drive size) from the the left side list. In the DU status area you will see an entry for the S.M.A.R.T. status of the hard drive. If it does not say "Verified" then the hard drive is failing or failed. (SMART status is not reported on external Firewire or USB drives.) If the drive is "Verified" then select your OS X volume from the list on the left (sub-entry below the drive entry,) click on the First Aid tab, then click on the Repair Disk button. If DU reports any errors that have been fixed, then re-run Repair Disk until no errors are reported. If no errors are reported click on the Repair Permissions button. Wait until the operation completes, then quit DU and return to the installer.
If DU reports errors it cannot fix, then you will need Disk Warrior and/or Tech Tool Pro to repair the drive. If you don't have either of them or if neither of them can fix the drive, then you will need to reformat the drive and reinstall OS X.
2. Reinstall Snow Leopard
If the drive is OK then quit DU and return to the installer. Proceed with reinstalling OS X. Note that the Snow Leopard installer will not erase your drive or disturb your files. After installing a fresh copy of OS X the installer will move your Home folder, third-party applications, support items, and network preferences into the newly installed system.
Download and install Mac OS X 10.6.8 Update Combo v1.1.
So I took my iMac in to the apple store to have them look at it.
They did a hardware scan and found that the hard drive was failing and the system sensor for the hard drive was also failing.
They could replace the hard drive, but they'd charge $279 for the drive (installed), amd $100 for the data recovery/copy. And it would take 5 days to get it done.
Instead I went to Memory Express and picked up a WD Caviar Black 1TB drive (almost exactly what the original was) for $85, and picked up a Torx bit set and Glass Suction cups from Canadian Tire. Took about 1hr to swap the drive (taking my time).
Everything seems to be working again now and I'm in the process or copying my files over from the old drive.
Thanks Kappy for your help.
Hard Drive: http://www.memoryexpress.com/Products/MX27676
(I took a couple pictures as I went, if anyone wants them let me know and I can post them)
Just so you know: If you ever take the computer into an Apple shop for repairs, they will refuse to repair it regardless of whether it's in or out of warranty because you opened the computer. I learned that lesson the hard way, and it cost me a lot of money. I now have an iMac with a bad panel that isn't repairable.
Thanks for the heads up. Yeah I wouldn't recommend that you replace it yourself if it's still under warranty. In my case the warranty was up.
Also, the 5 days of downtime would have cost me more (in lost contract work) than a new iMac would have cost. So it made more sense for me to repair it myself. Also, I'm sure that other repair shops (ie: http://www.mymacdealer.com/, http://www.westworldsales.com/) would still work on the computer if it was broken in the future.
In your case, couldn't you just get a replacement panel (like this one: http://www.welovemacs.com/6615970.html) and replace the panel yourself? You already had to remove the panel completely to replace the hard drive, so it would be a quick and easy swap.