Thanks for the info.
I have no idea whether FCE 4 will work in Lion or not... so I couldn't suggest one way or another with regards to using FCE in Lion.
You can use Motion 5 in Snow Leopard (10.6.8) and then export your creations from Motion 5 as quicktime movies and import them into FCE 4.
To be honest, if I were in your positions I would buy an extra external drive and clone the system drive to the external (this creates a bootable mirror/backup of your Mac).
Then I would upgrade to Lion and buy FCP X and Motion 5 and spend a couple of weeks learning the basics of the two programs... (FCP X is very, very different to FCP 7 or FCE 4).
I don't know if you're already a subscriber here at macProVideo... but if you are then you've got access to all the FCP X and Motion 5 tutorial-videos which'll save lots of learning time!
So, all in all that solution would set you back about $500 I think...
Oh... sorry - this isn't frugal... but I wouldn highly, highly recommend you add more Ram to your iMac. It currently has 2GB. Not sure from here how much you can insert... but if it is less than 3/4 years old, perhaps 4 or 8 GB of Ram. 2GB is the minimum you'll need to run Lion. Other applications like FCP X and Motion will cry out for more...