Yep, that means your drive is on its way out. If you still have AppleCare coverage, now would be an EXCELLENT time to make use of it. You'll also want to be backing up any data you don't want to lose from that drive while you still can.
If you don't have AppleCare coverage, then the fact that it's an iMac we're dealing with makes things quite a bit more complicated. You probably want to pay someone else to do it for you. You CAN do it yourself, but I would strongly suggest you Google for a take apart guide so you have some idea of what you'd be getting yourself into. Then you can decide if it's something you want to risk or not. I wouldn't recommend it to anyone who doesn't have the proper tools, which I'm guessing you're not.
Call Apple, find out if you're still under warranty. If not, ask them what it would cost for an out of warranty repair, and the names of one or two AASP's in your area to see if they'll offer you a better deal.
Off the top of my head, I'd say that it'll cost you probably at least $100 on top of whatever a new hard drive runs you. Apple may offer you some flat rate, no questions asked, repair deal. Probably not worth it in your case. They'll just put in an identical drive. A local AASP will probably put in any part you give them. So if you've had your eye on some of those 1-2TB drives, now would be your chance. iMacs will accept any 3.5" SATA drive. A local AASP will likely put in any part you give them.
And on the off chance you happen to be in the SF Bay Area, let me just warn you against an AASP called DT&T in Fremont. I've had a few dealings with them, and they're not what I would call a very ethical company. The short version of one particular story, I needed the logic board replaced on a MacBook... I had the logic board, which I gave them, and they charged me for the part I gave them and the labor to put it in. There's more to it than that, but let's just say they are not what I would consider to be a highly ethical company. I would recommend steering clear of them.
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