I finally figured out the issue with my mac, and it turns out to be a very common problem due to a faulty design with the late 06 iMacs.
You can see a video of this problem here (not my computer, but same problem, mine isn't this bad yet, but it's getting there..)
YouTube - Demo of iMac Graphics Defect (Late 2006 iMac, ATI X1600 GPU)
Apple is trying to dodge responsibility (*** apple!!), so there is a petition you can sign to help get a recall and get this problem solvied.
Request to Recall Late 2006 Intel iMac - Petition Spot
You can see a video of this problem here (not my computer, but same problem, mine isn't this bad yet, but it's getting there..)
YouTube - Demo of iMac Graphics Defect (Late 2006 iMac, ATI X1600 GPU)
Apple is trying to dodge responsibility (*** apple!!), so there is a petition you can sign to help get a recall and get this problem solvied.
Request to Recall Late 2006 Intel iMac - Petition Spot