The temperature reported is WILDLY inaccurate. It is normally only good as a relative indicator.
There is a shareware called Thermograph that has a calibrate mode(you supply an offset value). The other nice thing about Thermograph is it reads BOTH processors in a duallie. That became important to me when I got a DP 500. Cheap too, think it was 7 bucks or something...
With the extras in the iMac, it probably wouldn't hurt to replace the internal fan with a higher velocity/flowrate one. My old cyborg'd 8500 has 7 extra fans in it and a bunch of holes drilled in the side.
Before you modify it, since it's kinda old, find someplace with clean compressed air and blow it out real good(or get a couple of cans of it at any electronics/computer store). Get rid of all the dust-bunnies and see if it runs any cooler. Pay good attention to the fan blades. Any buildup on the vanes will really kill your airflow. If you add an external fan, check the iMac's airflow with a cigarette, watch the smoke. Place the fan so it aids the flow(real simple concept but it gets overlooked easily)