Operation: Media Center
The Basics
You’ll need a computer and a TV. My TV made it easy because it has VGA output. But ideally you could even run HDMI if your PC had it. The machine I used for the job was my old Mac Mini. Not only was it small and unobtrusive, but it has infrared for remote-control and frontrow - apple’s media center software that comes with pretty much every mac now.
Along with this machine I brought along a spacious external hard drive with my music collection, movies, and other stuff. The thing is on all the time and shares it’s filesystem so I can get at it from my laptop.
Oh and if you’re not into Macs, check out Windows Media Center or Myth TV for Windows and Linux respectfully.
Universal Remote
I have a “learning” remote which I can point a remote to it and it learns the commands automatically. This made it very easy to have my Mac respond to my universal remote commands. For example, hit menu for front row, volume, next tracks, arrows, etc. Again I think you’d have to have a learning remote for this to work… but it works PERFECTLY
Keyboard/Mouse - or lack thereof
The last thing I wanted was a wired keyboard and mouse running across the floor. You can get a wireless keyboard and mouse for around $30 at Target, but I was kind of a chump and sprung for the Logitech diNovo edge. It has an integrated touchpad and all the media buttons, plus it’s small and rechargeable. It’s pricey but it’s the best thing out there. They made a smaller version just for this purpose. http://www.logitech.com/index.cfm/keyboards/keyboard/devices/192&cl=US,EN
Oh yeah, they make a mac and a pc version… but the pc version is cheaper and works on the mac anyways 
Recording Video
You’ll need either a video capture card or a similar usb device if you want to have your media center perform dvr functions. I’m not the person to ask about this because this wasn’t one of my goals with the project - verizon already provides a multi-room dvr so the pc doesn’t worry about this.
Next Steps
This is the fun part, you can set up your machine to behave however you want. See what goodies are available for your platform. I made a “TV” guest login with just the essential icons - web browser, tv listings (widget), games, and links to watching shows on iTunes, Hulu, and other TV stations. I also have all of my games ready to play full screen and on the nice surround sound setup. This part just takes some creativity.