Hardware or software malfunction?

Hi everyone.

within the space of a few days my iMac early 2008 started throwing the spinning pinwheel more and more until I couldn't even do anything after logging in. Finder would just hang at the slightest click. I got into safe mode ok and disabled the startup items and things were normal for a few hours. Then the erradic behavior came back until it eventually got worse. Many hard shut downs and restarts later and even in safe mode the spinning pinwheel will come at the slightest mouse movement or click after booting. At this point I can start normally, log in, and load Finder. But after that everything hangs and this also in safe mode.

Basically I'm wondering if my OS got corrupt somehow or if my drive is malfunctioning. I'd bring it to my trusted Mac repair place but they are on vacation until April 1st, so I have some time to troubleshoot it myself and I know a bit about Macs and OSX, as I come from the computer industry.

Here is what I have done so far

1. ran standard and extendend hardware tests from install DVD.

the standard test passed and the extended test threw an error

4HDD/11/40000000:SATA (0,0)

reserach on the interweb shows differnet reports which don't seem too alarming.

2. ran disk utility a few times from the install disk.

first verify was fine. second verfiy threw an error at "checking catalog file"

incorrect block count for file 2014.03.24.asi (it should be 110 instead of 55)

then first aid failed > file system or repiar failed.

in spite of this I could run repair disk and this came back "repaired successfully."

>> Here I began worrying and just wanted to secure my data. <<

3. I tried to run time machine in safe mode and that worked for about 10 GB and then TM stalled

4. i read that i could make a disk image of my main drive via disk utility as an alternative to time machine

i tried this, running DU from the install DVD, but got an "unable to create dmg input/oputput error". The internal HD is 320GB.

5. I booted iMac in target disk mode and hooked it up to my Powerbook G4 (i knew this computer would come in handy one day!) and began transferring my most important files which i hadn't backed up.

the file transfers work best when the computer is cold and when the file size is small. If i try for example to copy anything over 10-20MB in size the transfer just trickles at 2MB every few minutes. Smaller files or folders like email or pictures transfer fine for a about 30 minutes until the disk gets warm (i'm assuming this here!) and then things slow down dramatically.

I eject the target disk and wait for four hours or so, then when i boot it back up, transferring goes at normal speed. i have managed to back up most of my data this way the last two days.

6. as a last measure I installed OS X 10.5.4 (what shipped with my iMac) on an external firewire drive

I thought i could use this method to check the problematic disk with a better third party tool, clone the internal HD, or simply just erase the HD and reinstall OS X. I haven't tried those things yet because I am still unsure the drive is failing. I mean it really feels like something is very wrong, but disk utility runs on the HD with no errors and the hadrware test comes back error free. I know not to trust these utilities 100% but i would expect them to recognize a failing HD. Or am I being naive? If the disk is indeed failing then zeroing the drive and reinstalling OS X makes no sense and I want to replace the HD asap.

I'm curious to hear what the experts have to say. Maybe I missed something in my troubleshooting. It's been many years since I last had any serious Mac trouble, so i'm a bit out of touch. 😉

best regards, Dan