When you try and reset PRAM with Apple-Option-P-R if you keep holding the keys will it reboot over and over until you release them?

Reset the SMC (Formerly SMU).
Unplug all cables from the computer, including the power cord.
Wait 15 seconds.
Plug in the power cord while simultaneously pressing and holding the power button on
the back of the computer.
Let go of the power button.
Press the power button once more to start up your iMac.

That's a new one. But somethings wrong here. A couple of days ago I could see it accessing the USB drive but now nothing is happening. Will check again tomorrow.
It's 00:20 here. Goodnight.

Okay, talk to you tomorrow, or today all depending.

Resetting PRAM - only starts once then " you need to restart....."
Tried resetting SMC.
Was pressing wrong key last night! cmd-opt-shift-delete The light on the DVD player rapidly flashes as though it's accessing the DVD but this only lasts about 2-3 seconds then it is a regular flash every second for about 2 minutes. Then comes "you need....."

cmd shift option delete doesn't work, so if that's loading right it's not even accessing the HD.

If you can't take the computer back at this point I'd consider disconnecting the HD. It's a bit of a pain though. Removing the front bezel is a trick. There are videos on youtube.

I do it without their removal "tool" by pulling open the bottom a ways and getting up into the top with a thin long screwdriver to loosen the latches on the corners.

Then you can peel back the black paper cover over the logic board and get to the HD connector on the logic board without having to pull the screen off.

I guess there's an outside chance it's the Power Supply.

If you decide to go that way let me know, we can probably direct you to a take apart if you can't find one. You definitely have a hardware problem, and if it's not the HD or PS, it's probably really not worth fixing.

One last question, you've booted from the external DVD drive before?

Yes have booted a Windows machine and just had a quick try on the 17". Seems Ok.
Will have to try the HD as I have no way of getting it fixed otherwise.
Thanks for your time and will keep you posted. Sean.

Got the manual from 'Darryl's Mac Manuals'.
Just one more question - when I get the HD out how will I know if it is the problem?

I would just disconnect the HD from the logic board first rather than have to pull the LCD off to get to the HD. If it boots from the DVD and stays booted something's up with the HD. It may just be a matter of pulling it and putting into and external SATA case to see if you can repartition it. Do the procedure I mentioned above, but also in Security Options of Disk Utility do a one pass erase to see if all the blocks are okay and to put it through the paces for the whole HD.

Once you get the front bezel off there's no need to put it back on of course to check the machine sans HD, just put some RAM in.