I can help you as I upgraded it very recently.
The best PCu you can find is T7600 (merom) which I bought on ebay for 80 euro, makes your iMac Core 2 Duo 2,33 Ghz (as the late 2006 iMacs)
it is tricky to instal Lion cause Apple doesn't want or probably didn't think about it at all the consumer CPU upgrade. So when you double click on lion install on your new upgraded mac, the installer doesn't recognize the hardware you have.
But when you install from another mac as a target drive it scans hardware on the mac you are using to install (and skips the iMac). After the install, while you where using the other mac, you should go and delete on iMacs hard drive:
/Volumes/<name of target drive>/System/Library/CoreServices/PlatformSupport.plist
if not your iMac doesn't start at all, because it is not in the supported platformlist of the lion operation system.
it is very simple, and you can ask me if anything is not clear.
PS: if you want my sincere opinion, I used Lion on my early 2006 iMac for about 2 weeks and I should say that Lion suffers much on just only 2GB RAM. Lion is a RAM monster, and plus 64bit applications use more RAM than 32bit ones. So there is a noticeable difference on slowness.
I did a second partition and installed Snow Leopard, just to test the differences, and I ended up using more Snow Leopard (there 400MB RAM difference ob start up and it consumes lesser generally)
Lion is nice, shinny but on desktop computer has really little sense especially if you don't have enough RAM to support it :)