I have recently added a computer to my entertainment center. I got the idea of doing so when I got a new HDTV back in March and saw that it had a VGA port on the back. Here is a story of what I did to make it work properly to get the most enjoyment and usability from it with the least headaches.
The first choice I had to make was what sort of computer to put in the space. I knew I didn't want a big ugly beige tower. I considered a laptop, but that would have looked odd or it needed to be hidden somehow. I settled on a used small black IBM workstation P4 w/HT and 4 GB of RAM loaded with Vista Ultimate. It didn't look too bad and didn't take up a lot of space, plus it had a fair amount of USB ports on the back. I was going to need a fair amount USB ports on the back in order to hook up all the wireless stuff I needed.
I also ended up putting a USB wireless NIC for internet and networking, it was convenient because I already had a wireless router. I added a wireless keyboard and mouse combo device, the kind that is one unit with a mouse pad. It was a much cleaner look and was small enough to fit in a drawer nearby. I then added a wireless pointer for use when I just wanted to listen to music or other stuff that didn't require a keyboard.
Hooking up the sound required a special cable to convert 3.5mm plug on the PC side to a dual RCA plug set on the AV receiver side. Luckily I have a collection of lots of different cables, but had I not had one handy they are pretty cheap at most electronic and sound stores. It was well worth it to hear my fairly significant MP3 collection played on my 500W living room surround sound system.
The video was simple enough; I just connected to the VGA port on HDTV , mainly because it was the common connection on both the TV and the computer. VGA output is comparable quality to component video which is better quality signal than S-video. I know that some HDTVs don't have VGA inputs and require a fairly cheap change of the video card.
All in all, it cost me a few hundred bucks, counting the computer, and a few hours, most of which was spent digging up cables and copying entertainment files from my home computer to the entertainment center machine. It was well worth the effort and expense. While there are dedicated devices that can stream video and audio directly, this was cheaper and more reliable. Since it just a standard desktop unit, it will be fairly cheap to upgrade and the networking bit is pretty simple and straight forward.