It's graphics card failing/overheating. If artifacts/picture corruption are present on screenshot - it's certainly it.
Like mgartner0622 said: if you want to ensure about it, boot from Install DVD and see if it will change anything.
Possible fixes:
- if it's overheating: decent dust cleaning of iMacs innards and replace thermal paste on GPU
- if above won't work: only GPU reballing/replacing could help. GPU is soldered on logic board, so you can also replace entire lobo.