IMac G5 HD Won't Boot. Please Help.

I have an iMac G5 (Power PC) which has been running OS 10.5.8 without any issues until today. 
When starting, I have a grey screen with the Apple logo, but the wheel beneath keeps turning and the computer will not boot up. I've tried to start it many times, and I just get the grey screen, etc.   P.S.  I do have a Time Capsule connected via Ethernet and Time Machine was active until this problem today.  The TC is disconnected at this point, as I was afraid I'd lose that back up.
Here is what I tried:
I disconnected everything except the keyboard and mouse (not internet/modem/Time Capsule)
I booted from the Leopard Disk, and ran Disk Utility. Message said the the HD appears to be OK
I booted from Drive Genius and ran the following:
1.  Repair-Verify:  Message was that HD appears OK
2.  Repair-Repair:  Message was that HD appears OK
3.  Repair-Rebuild:  Had a few invalid volumes.  Message was that the Volume Header and HD repaired successfully
4.  Repair-Preferences;  SAID THERE IS A CORRUPT PREFERENCE:   /bin/sh:xargs:command not found (There was no way that I saw to fix this!)
5.  Scan for Bad Blocks:  None found
I tried to start the computer again, but I still get the grey screen, Apple Logo, and constant spinning of the wheel WITHOUT a start.  It appears that the HD is not 'Dead' but has some issue, perhaps the corrupt preference listed.
So, I need help with my next step. Would any of the following work and if more than one, what order would be best?
1.  Use the Leopard Install Disk to 'Restore from Time Machine Backup'?  (Never have done this, so I'm clueless)
2.  Use the Leopard Install Disk and 'Archive and Install' the OS?  Can I do this since the HD has the updates to OS 10.5.8?
3.  Use the Leopard Install Disk to Erase and Reinstall the OS and then migrate from the Time Capsule (Never have done this either)
4.  AND, if none of this works, I'm assuming I could go get a new iMac and restore everything from the Time Capsule/Time Machine, even though there the OS in a new machine would be upgraded and also Intel Processor.  Yes?
In any case....PLEASE HELP if you can.....and THANKS

Thanks for trying to help with this :-).  I started as you suggested and here are the last few lines:
Airport: Link down on en1
Sept 19  17:49:16 jack-cohens-imac-g5 ReportCrash [52}: saved crashreport to /Library/logs/CrashReporter/securityd_2011-09-19-174913_jack-cohens-imac-g5.cra sh using uid: 0gid: 0, euid: 0 egid: 0
Sept 19  17:49:18 jack-cohens-imac-g5 ntpdate [63]: can't find host time.apple.com
Sept 19  17:49:18 jack-cohens-imac-g5 ntpdate [63]:  no servers can be used, existing
Sept 19  17:49:18 jack-cohens-imac-g5 mds [32]: (error) server: mdsync Launch failed: (ipc/rcv) timed out
Let me know what this means, please.  Also, I have the screen 'up', so I can give you more lines if that'll help.
Much appreciated.
Sandie

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