Keep in mind, that the 2006/7 MP's (1,1 and 2,1 models) use EFI32 based firmware, which already limits users in terms of graphics card updates (none of the newer nVidia products will run on these models). There's also some indication that they may be blocked from using some of the next gen ATI cards as well (not sure how accurate this is, but thought it worth mentioning).
Worse yet, Apple announced some time ago that they don't plan on supporting dual Kernels for long, so the ability to continue upgrading OS X will be limited as well. Lion currently supports K32 + K64 (developer releases), but this may or may not make it to the final version that gets shipped. I'd be shocked to see K32 support in 10.8, which isn't that far off if Apple sticks with their current development cycle.
Now assuming you plan on keeping this machine for more than say a couple of years, and you want to run recent GPU's and versions of OS X, you'd be better off selling the iMac, and picking up an EFI64 based model (started with the 2008 models, aka 3,1). The 2008 is more money than what you're currently looking at trading for, but it will last longer in terms of the ability to upgrade.
Just something to consider before leaping on this deal.