My PSU was replaced this time around. Not sure why, but now the CPU fan actually turns off when the CPU isn't running 100%.
When the CPU is running high, though, it is still very loud and annoying. I plan to do this once my warranty runs out:
http://www.scienceman.com/pgs/00_imacG5_macmod.html
If the logic board has "bulging capacitors", stand firm and make Apple pay because this was a
known issue.