Another iMac power on issue.

My fathers iMac (2.66 C2D, 4Gb RAM, OSX 10.7.4) has been giving him fits lately. It randomly goes to a black screen in use. In some instances the screen will return after moving the mouse or typing and sometimes the only way I have been able to get the screen back is to unplug the power, hold the power button for 30 seconds and reconnect power. PSU or GPU?
Ah, before I forget, I did run memtest yesterday and all RAM was ok. When I went to check the results of the test the iMac had once again black screened. When I got it on again the test results were still on screen and the results were fine.
Just happened again, think my best option is to convince him to get a new model since this one is 5 years old.

Have you tried running the Apple Hardware Test on his iMac to see if it comes up with anything? See this LINK.

I've tried holding Option+D before the splash screen to no effect. The iMac was upgraded to Lion about 2 weeks ago and I cannot launch the AHT no matter what I try.I also have the original Leopard install DVD's as well as a Snow Leopard DVD but do not know if those versions of AHT can be used with Lion. I have Googled the Black Screen of Death issue reported with Lion and also found links which mention a potential logic board failure. I hate to tell my Dad to reinstall Snow Leopard since he will lose a ton of pictures and home videos if he does this and obviously a logic board replacement would almost cost more than what the iMac is worth. I'm in the process of trying to convince him it is time to upgrade.

The Leopard and Snow Leopard AHT will work OK with your father's iMac even with Lion installed. If possible, make a backup of all his data before doing anything else. Use Target Disk Mode to access his iMac if you have another Mac that you can use. Both machines will need a firewire port to do this. See the following Apple KB article: LINK

Do you mean a Time Machine backup or clone the drive?