MacBook Pro running Leapord 10.5.5 cannot boot in normal mode

Question

My 6 month old MacBook Pro (2.4 GHz Intel Core 2 Duo, 2GB DDR2 SDRAM) stopped being able to boot up in normal mode two days ago, after I happily used iMovie to import home movies from a HD digital camcorder, created small clips to upload to Yahoo Groups. The problem happened when I tried to boot the MBP up in the morning. Boot-up progresses to a grey screen with the Apple logo and a frozen progress indicator. The top 10% of the screen has just turned dark grey.
After browsing the forum on a PC, I successfully booted up in Safe Boot mode. Unfortunately, iMovie would not load in Safe mode and complains about not seeing the "Quartz Extreme" graphics card. I seem to be able to start VMware Fusion but is unable to start my Windows XP-Pro virtual machines because it "does not have the ACCESS RIGHTS" to it. I assume both symptoms are restrictions of SAFE BOOT mode.
I've tried the RESTART icon after I booted in Safe Mode to the Login screen. It took me to a grey screen with a large Power button icon and a black text box in the center that says "You need to restart your computer. Hold down the Power button for several seconds or press the RESTART button.....".
I have created another admin user from my original admin used ID (in Safe Mode) and is ready to start some of the debugging procedures, but I'm slightly lost about where to start (being a Mac user only since May, and spending much of that time working in a Windows VM). Could you please point me to a recommended orderly procedure to debug and restore my computer.
I have been using Time Machine to backup up my Home directory up to about 40 days ago, but has been away from home base for a while. Will be able to resume backup again in a couple of days. As long as I can access a USB drive through my USB ports in Safe Boot mode, I can copy my data changes for the last 40 days before I start doing anything dangerous with my MBP.

Answer 1

Why? This second hard-drive I want to format using FAT-32 is intended to be my offline storage that can be read by a Windows PC. I know that my Windows PC cannot read the HFS formatted drive I use for TM backup. I hope that once I move the bulk of my data offline, I can create a bootable disk image of my MBP with a manageable size.
I did used the default "HFS with Journaling" option when formatting my external USB drive for Time Machine backup. That's the only backup mechanism I use. I do not have another Mac (being a 'rebel' in a community of loyal PC users) accessible to use the backup data while I'm servicing my MBP. Since all my data is in industry standard data format (like rich text, jpg, html, mpg, flv) and Windows applications data I created in a Windows Virtual Machine on my Mac, my intention is to be able to view or use some of the data on a real PC while my Mac is down.
From reading Apple's own documentation on Time Machine (and please correct me if I'm wrong), with my TM backups, I should be able to restore my Mac by:
1) reformat my hard disk and re-install Mac OS X from the Install CD (Leapord 10.5.4)
2) update from Apple.com to Leapord 10.5.5
3) re-install all applications I've installed since I bought the computer
3) Start Time Machine, and select a certain option that would restore my whole system
Questions:
1) I've only use TM backups to restore individual files, never all files. Do I have the correct restore sequence? Has anyone done this successully? It looks like a mix bag when I look at the Time Machine discussions. Any tip would be appreciated.
2) I have moved directories around (before I realize the significance of the HOME directory) since I bought my Mac; in some cases returning the directory back to their original parent directory. Does this cause problem with TM restore?