If they both use Thunderbolt, does the iMac have to be running in order to use it as a display? Meaning the entire computer will be running, fans and everything?
I was asked the same question the other day and while it isn't worded very clearly the Apple Support Article linked above says (emphasis mine):
iMac (21.5-inch, Mid 2011) and iMac (27-inch, Mid 2011) support Target Display Mode via Thunderbolt to Thunderbolt cable (2 m) when the source is another Thunderbolt-equipped computer.
I read that as saying you need both machines to be Thunderbolt-equipped. It doesn't say it won't work with a MDP equipped but I suspect that this is the case (and I haven't had time/been bothered to go buy a TB cable to test!).
I can certainly attest to a 2011 iMac not working with a MDP-to-HDMI converter with a PS3. I read that it wouldn't work... but I just wanted to try it anyway.
I too am hoping that Apple will flip the switch and let non-Thunderbolt devices make use of these 27 inches of pixel glory. Sometimes I just want to sit at my desktop and have my videogame consoles or iPad hooked up to my iMac, rather than my 40in 720p TV, ya' know? The resolution is literally twice as good.
I'm honestly surprised no one has found a hack for this or anything, because it seems strictly software related.