Of course, any "ultimate" processor upgrade is going to be overly pricey without being as much as you expected because of the iMac's shape and heat constraints.
I'm sure that you could overclock the thing, if there is source code available on another system but would you dare at the processor cost?
If the iMacs cooling is the same or superior to Intels boxed chips then I wouldn't worry too much about heat constraints.
Would I overclock? Yes I would. From Intels Extreme Mobile Processor brief:
For experienced users who desire more
capability, the Intel Core 2 Extreme mobile
processor bus ratio locks (overspeed protection)
have been removed. This offers added technical
flexibility in customizing the system even
beyond the specification limits.
Every C2D chip Intel has is at least 25% overclockable. Some people have been getting 60% overclocks depending on the chip. The Extreme line is multiplier unlocked. So that means you can bump down the multiplier and then crank the system bus up. Or leave the system bus as is and crank up the multiplier.
Of course it voids the warranty but then again so does changing the hard drive (at least in the iMac) so whats the difference?