The smallest PC I know of is the
PSU PC which has a complete working PC inside a ATX-PSU.
The smallest mass produced form factor at this time in Mini-ITX however this is due to having everything onboard such as graphics, usb, firewire and processor. The ITX platform is 170mm x 170mm square.
I run a LARGE number of these systems and find that they suit my purposes excptionally well due to the low heat output they have, I have even run them withough the heatsink for a period of time (not suggesting that its a wise thing to do however)
The biggest problem however is that the consumer has unrealistic expectations of the form factor.
In general the form factor has low power and the Via-C3 100 mhz processor generally performs around the 500-ish Celeron performance mark and lower according to some benchmarks.. As such these things make fantastic file servers, firewalls, and little linux box's for web surfing and office work.
WindowsXP, Games and bloated applications however run like a dog with three legs.