The Forces of Light and Dark in Ico
Yorda is probably the most enigmatic element of the entire story. There is virtually nothing we know about her for certain, and in this case to even speculate is difficult. The reason for this is not a lack of information, if anything the problem is the opposite. We are told and shown a number of things related to Yorda, but they are all so mysterious and unexplained in their own right that there is nowhere to start in trying to figure it all out. This is likely intentional since Yorda's mysteriousness is critical to the story, an obvious example of this is that the first time through the game the player is not even told what she is saying when she speaks.
During the story Yorda is seen in two different forms. Her 'Light' form is the form she is in when Ico first meets her. She appears almost human in this form, though there are some notable differences, such as her exceptionally pale skin and her elf-like ears. She also seems somewhat luminescent, as if a light somewhere is shining which reflects only off her, though this is possibly a trick of the light due to her pale skin and white dress.
Her other form is, predictably enough, her 'Dark' form. This is the form she has when she is a Dark Being, the same form that the Queen has. Physically she has the same basic shape as she did before, except now she is made of pure darkness, making her look like a silhouette of her other form. This darkness is in stark contrast to her Light form; they are more or less complete opposites.
An obvious question is which of these is her original or 'true' form. As with the Queen, the fact that the fortress she resides in is based on Light Magic suggests that her Light form is her true form. In the section on the Queen I point out that it is likely that the Queen was originally a Light Being, which supports the idea that Yorda's true form is her Light form. However in Yorda's case there is some suggestion to the contrary in the form of the dream.
Yorda's first appearance in the story is actually before Ico meets her. She is the focus of the dream he has when he is knocked out after escaping from his casket. Since it is a dream it cannot tell us anything for certain, however there is enough in it to suggest various possibilities about Yorda's past.
In the dream Yorda appears in her cage through something which somewhat resembles the portals the Spirits appear through. Unlike the portals it seems to be an actual liquid which drips out of the cage, but given that it is only a dream it is close enough to remark on the similarity. I state elsewhere that it is likely that the Queen controls these portals rather than the Spirits themselves, as those Spirits never show any signs of having any significant power. If this is the case then this part of the dream would appear to be showing Yorda being put in the cage by the Queen.
Ico is also present in the dream. He approaches the cage in almost exactly the same manner as he does in reality when he wakes up. Ico's presence in the dream tells us that this is not a flashback of some kind, as Ico could not be present in a flashback, as he has not met Yorda yet. You could speculate that it is a past event and he is present merely as an observer, except that he interacts with the dream by being sucked into the portal in the wall, and his approach of the cage reflects a real event yet to come.
Probably the most significant aspect of the dream is the fact that Yorda appears as a Spirit in it. She is only seen in this form twice; in the dream, and at the very end of the story. Not only had Ico not met Yorda at this point, he had no way of predicting that Yorda would become a Spirit; even the player does not. That Yorda is a Spirit in the dream must be intended to tell us something, but exactly what, we cannot be sure.
Interpretations of the Dream and Yorda
One way to interpret Yorda's appearance in the dream is to take it completely literally. In this case it would be indicating that when Yorda was put in her cage she was a Spirit, the implication being that she originally was a Spirit, until she changed or was changed into her Light form. It is also possible that it is not attempting to indicate an exact series of events, but merely tell us that while Yorda appears throughout the story to be a Light Being, she is actually a Spirit and became a Light Being at some point before Ico met her. The fact that she appears as a Spirit in the cage may not mean she actually was a Spirit at that time; it may simply be a reference indicating that she was a Spirit in the past, and changed into her Light form at some point before Ico met her. Assuming that the dream is telling us that Yorda was originally physically a Spirit, it becomes necessary to explain why Yorda would later change into a Light Being, which is not made easy since the Queen's objective in Ico is to turn her into a Spirit.
It is possible to continue this same basic idea without taking the dream as literally. The dream shows her in the cage where Ico finds her, and depicts him finding her exactly as happens in reality. This may be a direct reference to this initial encounter, an attempt to tell us that what Ico will soon find in that cage, while it may have the appearance of a normal girl, is in fact something else. Rather than telling us that she actually physically was a Spirit at some point in the past, it may instead be indicating something about her true nature. So she may always have physically been a Light Being, up until the end of Ico, but is depicted as a Spirit in the dream because that is what she 'really' is.
We can consider interpretations of the dream in which the depiction of Yorda is not attempting to speak to her true nature. In this case the dream must be trying to tell us something else by depicting her in this way. Since her mother is a Spirit during the course of the story, it is easy to imagine that this depiction of Yorda is simply to make the connection between her and the Dark Magic forces in the Fortress, a connection which we are not aware of since we haven't even encountered Yorda yet at this point. This is similar to the less literal interpretation above, except that we are now not taking it as meaning that Yorda is a Spirit, simply that she has some relation to Dark Magic.
I pointed out above that what we see in the dream is not likely to be a simple event like Yorda being put in the cage, but is probably a more significant event like her creation. An obvious conflict in the story is that Yorda is a Light Being while her mother is a Spirit. The dream may actually be showing us the resolution of this conflict; that while Yorda is indeed a Light Being, her origins are related to Dark Magic due to her mother being a Spirit. The fact that it show accurately recreates Ico finding Yorda in the cage may be to tell us that it is referring to Yorda as he finds her on that occasion, not trying to tell us that the person he finds is not a Light Being, rather simply that there is more to her.