Software update is perfectly fine. No need to go around the houses. You will just have to delete that plist after updating for it to boot up. Every major point update will recreate it, unfortunately.
For those that feel adventurous, you can also flash the firmware to 2,1. Details also via Macbidouille linked above. The hardware in Mac Mini 1,1 and 2,1 are pretty much identical save for the cpu. Updating the firmware allows you to install more than 2GB of RAM, which will help with Lion. I did this on mine with very little effort. Unfortunately, one of my memory banks had already died months ago so I can't test the memory side of things but other posters to that forum confirm that it works. This upgrade is also reversible.
If you want to try,
read post 86 onwards.