Buy a new imac ? or upgrade hardware ? help.

Welcome!

First, how much RAM do you currently have? Most of that model shipped with 2G RAM. Officially it supports up to 4GB RAM and unoffically it can do 6GB with the right modules.

You can buy Snow Leopard 10.6 on disk for US$20 directly from Apple and upgrade. I ran Snow Leopard without issue on a Core 2 Duo 2.2gHz Mac for years with only 2GB RAM. Snow Leopard supports current iDevices like the iPhone 5s. From the 5s tech sheet:

Were it me, I'd upgrade the OS to Snow Leopard and bump the RAM to 4GB. Should run OK. When I upgraded my Core 2 Duo Mac from Leopard to Snow Leopard, it became more stable.

Should you like some ideas of what could be causing the panics, post the panic log from the next one you get. We may see something easy to fix.

Normally being short of RAM does not cause panics. Bad or incompatible RAM can cause them, however.

Here is the web store Snow Leopard Link:

http://store.apple.com/us/product/MC573Z/A/mac-os-x-106-snow-leopard

Before you order RAM, let's verify your model. I don't recall encountering a 2008 that shipped with only 1GB RAM. We need to find your "Model Identifier." From your Apple menu, select "About this Mac" and, in the resulting window, click the "More Info..." button. In 10.5, that lauches System Profiler; its first screen has what we need:

Note the line I've indicated with the red arrow--that code will preciesly identify your iMac and tell us what kind of RAM to get.

DOH! BIG epiphany just hit! Your system is new enough to have shipped with 2GB RAM but reports 1GB, and you are getting kernel panics. That could indicate you had the normal two, 1GB modules but one has failed. A failed module can cause KPs.

Open the RAM door on the bottom of the computer and see how many modules are there. If there are two, pull them and see what size they are. If both are 1 giggers, one is dead, or its slot has failed.

Video instructions for accessing RAM in your model:

http://eshop.macsales.com/installvideos/imac_mid_2007_mem/

Perfect! This is a link to the correct RAM for the iMac 8.1:

http://eshop.macsales.com/shop/memory/iMac/Intel_Core_2_Duo_PC2-6400

from the vendor I use. I've been getting RAM for the 17 Macs in our family from these guys for over a decade and am very satisfied with the prices and service. I'd avoid getting RAM from "just anywhere" due to some RAM being maybe "Mac-compatible" but not completely "happy in Macs."

Crucial.com is also good but may not tell you the option of 6GB as that's not in Apple's orig specs.

Avoid Kingston "Value RAM." It's not worked well in Intel Macs. Their standard RAM seems OK.

You are ahead of me. I was going to direct you to the Memory section of Profiler but you found it. Good! A dead module can cause Profiler to declare a slot empty. To tell if its a dead slot or a dead module (assuming you see two when you get the plate off), simply swap the modules with each other and see if the computer starts. If it does, check Profiler again. If the "empty" slot moved, it's a bad module.

Do you have the original system install/restore disks that came with your iMac? If so, find the one that has Apple Hardware Test and run it. I believe it will report if a RAM slot is dead but should definitely report a failed RAM module.

A dead slot would normally be very bad (logic board replacement) but, with the availability of the big 4G single modules, you could install one of those in the working slot and still have 4GB--plenty for Snow. Heck, my 2012 MacBook Pro came with 4GB RAM and it's doing OK with Mavericks!

I'm calling this progress!

Allan