How has it hurt the machine?
Part of the machines function is to allow for an easy no hassle workspace. The clutter that the current line of iMacs clears up is a huge functional selling point. I loved the way the iMac G4's looked, more than i like the current line. But, thats purely a matter of taste (form). In terms of function, the only upper hand the G4's had was their flexibly reoriented display.
Like i said before, I know PLENTY of people, from professionals to grandmas, who love the all in one design not only because it looks nice, but because it takes up much less space. In small kitchens, cramped bedrooms or crowded small businesses, this is actually a big deal.
It's hurt it in many, many ways, imo. First, it's limited what hardware they can put in there. Back in the G5 days, there was a long delay getting speed bumps as they had to wait for a lower power consumption/lower heat chip. Now they are stuck using laptop components, which make the machine slower and more expensive than it could be. The optical drives are slow, due either to the orientation they are mounted at or the limitations of the type of drive they use, or both. The minimal space for heat dispersion caused lots and lots of trouble for the iMac G5s, and it's a small problem for the current line up.
There's almost no overall space usage difference between an LCD+mini and an iMac... in fact, the mini lets you use space more efficiently because you can chose to use a smaller LCD if you really want to. You can mount the computer somewhere out of the way, if you want. If the best reason we can come up with for having the ENTIRE MIDRANGE Mac lineup be AIO is so people can put it in their kitchen... well, there's a problem.
I know lots and lots of people who don't like the AIO design for a number of reasons (look at the number of people on this board who talk about this every day). Both pros, grandmas, and little furry creatures from Alpha Centauri (ok, not really the last ones)... does that mean that it's not a great answer for everyone? No, of course not! There should be CHOICE.
The iMac G4 had more going for it than the positionable display (which was a really nice feature). It had a system housing that could accommodate a proper optical drive, could be redesigned without it mattering what LCD they tacked onto it, etc. The iMac G5 is just a lousy case of choosing form over function, and the product reflects that, imo.