No, they're getting what they want. A dSLR with great performance for
under $1,000. The lens might not be perfect, but most entry level
buyers aren't going to splurge for a more expensive lens until much,
much later.

Exactly.
Too many people always compare against the best and forget about the
price. You get what you pay for. And you want to spent 1000$ on a
camera, you don't want to know which one is the best. You want to know
which one is the best for 1000$.
I know that my 300D is not as good as the 20D. In the same way as my
Honda is not as good as a BMW. But it is one of the best for the price.
And the 300D kit was definitively the best digital camera for the price
when I bought it. The D70 kit was better...it was 1.5 times more
expensive as well.