steve666's points are well taken, and there are several others. The simple fact is that once you plunge into the wild world of Windows peripherals, you're suddenly dealing with a lot more legacy and complexity than you'd like.
A PS/2-to-USB converter actually doing translation. It's not DVI->VGA (trivial, because DVI carries a VGA signal). It's a translation, and those will fail on some peripherals. Consumers will not necessarily know whether it's a PS/2 peripheral, either. The green plug went into the green outlet in the back, or their son assembled it for them, etc.
Two USB ports will be used up by the USB keyboard and the USB mouse. Apple even shows this on their site for the Mac mini, but they don't seem to think that it's significant that there's no accomodation for a printer, or scanner, or camera with a USB connection, or... ?!
I don't consider the size or the expandability to be issues. The size is actually a bonus from the point of view of just picking the machine up, and it's likely to inspire major geek lust (geeks are specifically targeted by this machine- look at the pitch about developers hooking it up to a KVM switch). This actually exacerbates the problem with needing adapters, though, because the purchase loses some of its appeal when you have to look up and pick up a whole bunch of niggling little adapters and hubs that you might or might not need, and bury your cute little Mac in a mass of cables and plugs.
I actually hope this machine doesn't appear in Target or elsewhere, as some people here are saying, because it will require some handholding. There will definitely be a step three in a significant number of cases, and possibly steps four and five, too.
Apple will have to solve the monitor problem, too, one way or another. I've seen a number of people leave to buy a computer, firmly decided that they will keep their monitor, and come home with a new monitor, and a new printer besides. And a new keyboard and mouse, too. Apple's adopted the trick of luring people in with a stripped down solution and selling them up, so they'd better be ready to follow through (might be a great way to promote the iMac, actually: "Or, you can just pick up that box, take it home, and you're all set."). The odds of people walking out with Cinema Displays are... low.
This is definitely a significant paradigm shift for Apple on several fronts. It will be interesting to see how well prepared they are for this new paradigm. If they think it's enough to just offer this little box, they're in for a surprise.
The most natural market for this machine is the geek/prosumer, actually, given that the lack of any peripherals means that you do have to have some sense of what's required, and what works, and how to integrate the Mac mini into their existing setups. If the mini's sales reflect that, it won't be the "marketshare Mac" after all; or, I should say, it will only be to the extent that geeks buy these things for their families and friends, buy the needed adapters and hubs, and set them all up.
Overall, the iMac remains uncontested as the best consumer solution that Apple offers. The Mac mini might work as a way to convince people of that, who knows?