I have the same mid-2007 iMac, mine with upgraded 2.6 GHz Core 2 Duo, 6 GB RAM, ATI Radeon HD 2400 XT w/ 128 MB RAM, and upgraded 1 TB hard drive.
It installed just fine for me (well, other than some nutty App Store issues where it decided to re-upgrade all my iLife and iWork apps three times... I had to wait for the third download to finish before they would work.)
But it is *VERY* flaky. iMovie crashes ALL THE TIME now. It crashes 75% of the time I try to import video from an AVCHD SD card. Sometimes just browsing the video library will crash it.
Note that all of my video library (events and projects) are on an external USB hard drive, and I have about 800 GB worth of raw+project files. The vast majority of the video is imported AVCHD, with some MJPEG and old DV. I don't know if my library size is just too big for it to handle well... (Older versions of iPhoto had problems with my photo library, too.)