Actually, the G3 is noticably faster than the iMac. The BIGGEST difference is the 7200RPM ATA66 hard drive, compared with the 4500RPM ATA33 drive in the iMac. Add to that the PPC750 in the Blue G3 has 512K cache while the 750cxe in the iMac has 128K. The Blue G3 is in nearly every way "better". The most important thing for me though is... I have the option of dropping in a G4, or, as you say, a much nicer video card, as well as other peripherals... things I couldn't even consider with the iMac.
Also, I can use any VGA display I want, including my 21" CTX. With the iMac I'm limited to 1024x768 at 75hz no matter what.