Thought is was my 20" iMacs hard drive... maybe not

Hi gang: Long time discussion board reader, first time poster.

Here's the story:

About three months ago, my mid-2007 20" iMac (which was running Panther...optical drive busted so I wasn't able to upgrade beyond this version) started getting the spinning beach ball soon after start-up. If I did nothing after start-up (just let the mouse sit in the upper left corner where it started out), it would be fine. But as soon as I moved the mouse and double clicked on ANYTHING (application, desktop file, folder, Finder window... anything), the beach ball would appear. And it wouldn't go away. I was able to get past this only once and just long enough to run Time Machine and back-up to an external hard drive.

After looking around this forum a bit and talking to some other Mac folks, I diagnosed the issue as a failing internal hard drive. Further reading here and a few dozen YouTube videos later, I decided I was up to the challenge of swapping out the drive myself. I bought a Western Digital Blue 1TB Desktop Hard Disk Drive (7200 RPM SATA 6 Gb/s 64MB Cache 3.5 Inch), locked the cats in the other room and made the swap. After closing the iMac back up again, I plugged it in, loaded the grey start-up disks that came with the machine into the new external DVD drive I bought and followed the instructions I found on this forum for erasing, partitioning and re-installing system software on the new hard drive.

Everything went smoothly... until the I tried to open ANYTHING after start-up!! Spinning beach ball almost immediately after double clicking (or opening with the keyboard) on any application.

I did a hard shutdown, started up from the system disk, ran disk utilities to verify, repair permissions, anything else I could do from there and tried again.... Still nothing. Just the 'ol beach ball.

I started over from scratch - erased, partitioned, reinstalled, rebooted and ending always with the spinning beach ball. Repeated this a half a dozen times to no avail.

I pulled the RAM and reseated them both. Still just the beach ball.

I ran every diagnostic I could think of or find here and everything turned up perfect. No problems with the hard ware anywhere.

I opened the iMac back up again and checked all my connections, reconnected and tried again... nothing.

I actually reinstalled the old drive just to see if maybe the new drive was bad. Went through the whole erase, partition, reinstall... and this time the beach ball appeared before I even got through registering! It froze at the screen where the iMac asked me to take a snap shot for my login! Just sat there spinning for three hours until I did a hard shut down.

And so I've come to you looking for help. I've scoured these pages (and other Apple forums) for clues and have not found anyone sharing my particular issues.

Any of you knowledgable folks have any ideas of where I should turn next? I'm handy and like taking things apart (but my actually knowledge of computers is limited) so I'm game for doing the work myself (and without an authorized Apple repair shop anywhere nearby, I'm kind of forced to DIY my way through).

Thanks in advance!