In my opinion, Blizzard know exactly what they are doing.
As mentioned a million times, not only will this limit and almost entirely banish illegal item trading, but it motivates players to see the other side of a game itself (should they choose). The auction house and its assosciated economies and markets are really interesting and the add an entirely different dimension to the game.
The flip side is what has already been posted above, the richest player wins. I can sort of agree, but hear me out.
1. There will be a metric truckload of work going into how balanced items are. That is, an item shouldn't be miraculously more powerful than anything else in the game world and thus demand a player to have it to stand a chance.
2. Every single player has an equal chance of getting said items. The "RNG" (random-number-generator, coined from the randomness of WoW) may be on your side, or not. If you play more, it makes more sense for you to have larger chance of picking up an item (for you or for sale).
3. Its real world players putting up real world currency auctions, not Blizzard. This in a way ensures that inflation is kept to a minimum.
4. You are the boss of how you play the game. Even if you don't use the real currency AH, you can probably find the exact same item on the non-real currency AH. Sure, it may cost thousands of gold versus a measly (don't take that literally) $5, but that is part of the game, whether you want to use the AH or not is your choice. Its a design feature. The flip side is if you can't limit yourself and control how you spend money, you shouldn't be surprised if you wind up spending too much real money on virtual items.
5. (unrealistically) YOU CAN TECHNICALLY MAKE MONEY FROM GAMING!!!11one!.. Whether this works or not, and whether it is worth the time or not will need to be seen.
All in all, I am super excited for Diablo III, and will dabble in both real world and non-real world auction houses, should I see the need to get a particular item.