Yeah. LCDs are designed to run at native res so if you run something that isn't the native res (e.g. a DVD on HDTV), it won't look as good as Blu-Ray would because the picture is stretched. iMac's resolution is so great that there simply isn't a movie at that resolution. So it will anyway run out of its native res. However, the viewing distance plays an important role as well. Sammich made a good post about it.
So to summarize, the iMac is nice for watching movies but movies cannot take full advantage of it. It also depends on how far away you will be sitting as the closer you are, the blurrier and pixelly the picture will be. The viewing distance is actually the main thing here. This is getting pretty confusing now It's hard to explain but yeah, it will be good for movies and stuff, just don't sit too close to the display.