Late 2008 iMac stuck in continual restart, startup screen issue

So, I come home last night and my iMac has shut itself off, not terribly out of the ordinary, so I start it up. However, the screen is covered in black blocks of pixels, with some color thrown in. The little wheel spins for about a minute I guess and then the next thing that pops up, although barely visible through the mess, appears to be the "new age" style kernal panic warning. It just cycles through this over and over without stopping, never getting any further than the first start up screen with the Apple logo on it. After hopelessly trying to restart a few times thinking it would go away, I hook it up in Target Disk Mode to my MBPro and start pulling stuff off the hard drive. Running Disk Utility on my iMac throws three errors, "incorrect number of file hard links," "invalid directory item count," and "the volume Hard Disk was found corrupt and needs repaired... Error: this disk needs to be repaired. click repair disk."
Originally I thought it was a graphics or logic board issue (I remember a similar looking display issue years ago on my G4 Cube), but now these errors make me think its a directory issue? I really don't know.
Here are a couple pictures of what I'm talking about:
http://bit.ly/12tFDM7
http://bit.ly/12N8goN
http://bit.ly/11JWMQo
sorry about the external links, pictures were too big to be embedded.
Cheers
Edit: I should mention this is a late 2008 iMac, running OS X 10.8.3

Run Apple Hardware Test in Extended Mode 3 times. If it reports errors take it in for repair, Apple does not publish the error codes so please do not ask what they mean. Only an Apple Store or AASP will be able translate them for you. You can find instructions for AHT at:
support.apple.com/kb/ht1509
Good luck.

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