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What are the expansion possibilities and costs for this (still) "closed" proprietary system?

With 2 firewire ports and 4 USB ports you can add literally hundreds of items to an iMac. As for being proprietarty, I don't know what you are talking about. MacOS X has an "Open Source" core called Darwin that anyone on the web can download the source code. You can't do that with Windows XP. There is not one chance in hell that Bill Gates will let you read the source code for the core of Windows XP.

At $1,200, an iMac is cheap compared to buying a base PC and adding all the features that the iMac supports such as firewire, Nvidia graphics card, 15" LCD, dual monitor support, 60 gig HD, 384MB Ram (can't find one with 128Mb to buy -- all the stores give you 256MB with purchase for free), etc.

As is usual with people who are given equipment to rave about, this person has neglected what matters to the real people in the real world:

Toupsie already answered your questions about price and expansion, but I wanted to make a different point: You, and a lot of other people who have such trouble with iMacs are forgetting that most people aren't power users, and are not the same "real people in the real world" that you are. The average PC purchaser - of any platform - will never "expand" their computer beyond adding some better speakers and maybe a scanner. They'll probably never even open the box, except to add some RAM. (And at least half of those people will take their machines to a dealer just for that.)

I've seen incredibly detailed attacks on the new iMac in a number of places on the web, always going into great detail about the technical aspects of the machine: about how far behind the G4 processor has fallen compared with Intel and AMD; the not exactly state-of-the-art display chip, the slower RAM, etc. And they're all absolutely correct about those facts. However, they're all missing the point: If the machine does what it puports to do, in a way that pleases the purchaser, then they will be happy. My parents have what is, at this point, a truly ancient original Bondi iMac. Well, okay, it's a Revision B, but the only difference between it and the true Model T iMac is 2MB of extra VRAM. It only has 96MB of RAM, and a 4GB hard drive. And they are as happy with it today as they were they day they bought it. It does what they want - web surfing, word processing, printing, a little Photoshop stuff (my mother's an amateur photographer) - and it does it well. They have never opened the case. They have never expanded. And they never will. In fact, the only reason they're even considering an upgrade (and they're thinking 6 months to a year down the line) is because my mother wants to change the wallpaper in the room and thinks the greenish-blue iMac will clash with it! (Well, okay, I admit, she's getting a little hungry for a Firewire port too.)

Also see James Lileks's two weblog posts (1) (2) on his extremely positive experiences with his iMac. He is the quintessential "real person in the real world" when it comes to the who the average computer consumer is today. He is who Apple is aiming their iMacs at. And he is completely satisfied.

And in the end, that is ALL that really matters. That is why Apple already has a record number of orders for their new iMacs, even more than they did for the originals. You can crow until the end of time about the technical superiority of Intel-based PCs (and I use "technical" in both senses of the word here), and you will often be correct (less so when we talk about standard Power Mac G4s instead of the consumer-oriented iMacs). And it just won't matter one bit.

(For the record, I have and use both Macs and Windows machines, and have plenty of positive and negative feelings about both.)