Superficially it looks like dirt on the display, but it's inside. I suspect some sort of LCD delamination or glue defect, perhaps related to the all the heat problems the G5 iMacs were known for. At 2.5 years this machine is out of warranty -- including my credit card extended warranty.
I can't find much about this on the net, so it's probably bad luck. We have a good Apple repair facility in Minneapolis (first Tech), I could try hauling the machine out there if I get the energy.
Update: Sounds like this.
Update 6/17/11: Three years later the band is about twice as wide. This is a kid and movie machine now, and we don't notice it much.