This kinda sux, the iMac itself can't be worth more than $499 (and I'm being gererous here) and currently Apple has nothing to compete in that arena where white-box manufacturers and Emachines rule, the iMac is full or outdated parts, the older G3 chip, older graphics card, curved 15" CRT monitor, and the one thing that differs it from those ultra-cheapo PCs is the build quality.
You don't normally see two year old PCs that are in the same condition as the two year old iMacs, nor are most of them running the latest version of Windows with no hassle, many people are happily running OSX on their iMacs and they'll still get another good year out of them at the least, the iMac shouldn't die, its price should just be cut in half with its hardware updated also, the kind of people who would buy it are not the kind of people who are in the market for the higher magin machines so I don't think they would lose anything by keeping the classic iMac at a much lower price.