My wife has iMac 27" (2009) with Snow Leopard and I want to use it as an external monitor for development on Mac mini with the latest Xcode/Lion (I don't want to upgrade the iMac to Lion to get the latest Xcode because I don't want to mess with her computer). Is it a matter of buying a Belkin mini DisplayPort-to-mini-DisplayPort cable and re-using existing keyboard and mouse? Any other issues?
You may have already figured this out, but yes. You can buy that cable or the Apple Thunderbolt cable which is backwards compatible with Mini DisplayPort.