Weird colors on the top of my screen

For the past month, there have been these weird small blobs of color on my screen. I took a photograph of the issue and pasted it here. I tried resetting the PRAM and that did not help. I know it is not a monitor issue as the colors only appear during the white loadup screen and the desktop. They do not appear during the blue screen before loading the desktop.

I have a 2008 iMac 2.4 ghz Intel Core 2 Duo with 1 GB 667 Mhz ram with OSX Leopard 10.5.

I hope a simple fix will get rid of these annoying color blobs.

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I couldn't tell from the photos you uploaded as they are not clear enough and show no blobs at all.

However, the problem may in fact be your iMac monitor if the color blobs show up when the screen is all white. The blue screen may be covering up the colors. Try selecting a program or background that is light in color and see if the blobs show up. Also, keep things like speakers away from your iMac monitor. Anything magnetic such as a speaker can cause that problem.

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Look more carefully please. See the blue and magenta blobs? This is definitely not magnetic interference. It is more of a software issue of some sort.

I was able to see them in that photo. Yes, it does look like some weird overlapping of colors of some sort. Try booting your iMac in safe mode - hold down your shift key during boot up. That will stop all third party drivers and startup programs from running. Let us know if the color spots show up while in safe mode.

It is still a problem, the colors appear as horizontal lines on the boot screen as well.

OK, one last test... Do you have a spare monitor or TV that you can attach to your iMac? If you do, you will need an adapter and cable. Probably a Mini DVI adapter to VGA or whatever your external monitor or TV uses for video input.

Since the color spots are also showing up as horizontal lines on the boot screen and while in safe mode, that probably eliminates software as a problem. Now we have to determine if it's the LCD or your iMac graphic chipset (GPU) that is at fault.

I have no spare output. So, in essence, it is about time to buy a new mac. As I said, the current one is almost six years old (will turn 6 on February 19) and I have used it heavily everyday.

Okay, here is a puzzle, I change resolution to see if it would go away, but the lower the resolution, the larger the lines. Also, when the mac goes into blue screen mode during boot up, the lines are not there. So obviously, it is not a hardware issue.

That does not eliminate hardware as the fault. It make take a few seconds for things to warm up before the symptoms appear. If it was software, booting up in safe mode would not have shown the spots. Also the lower resolution with the thicker lines points to hardware. The best way to test is to attach an external monitor or TV as I explained above.

Can you explain to me why it is likely a hardware issue?

I never said it was "likely" a hardware problem. What I have told you in several replies is that you need to positively eliminate that possibility. I showed you how you could do it and now it's up to you.