An iMac has its graphics chip right on the logicboard.
An Intel iMac 20" Aluminum is well beyond the capacitor issue of the earlier iMac G5s.
10.5 is well within the spec range of the iMac.
Unless you:
1. Installed a different kernel extension for your graphics chip at any point than what was designed for it by target mode or root/superuser.
2. Installed some graphics chip sensitive software that runs at startup (Check your Apple menu -> System Preferences -> Accounts -> select your account and select Login items).
3. Installed some third party Appearance Manager extension (usually requiring an APE System Preference).
The chances of software failing on the GUI of the Finder are exceedingly slim.
It is much more likely the hardware has failed, and the operating system update is more sensitive to that hardware. RAM can create such a failure too*:
http://www.macmaps.com/badram.html
And since the graphics chip is also RAM related, your best bet is to see if anything is detectable with teh hardware test. RAM being random in nature may only show its failures via updates, or running system intensive tasks.
- * Links to my pages may give me compensation.