AH, what a time to ask this question, cause I building one RIGHT now for my father.
The Windows XP Media Center edition allows you to watch live TV, record live TV, analog AND digital, record HDTV, play music, play DVDs, burn movies and music onto CD/DVD, and play mpegs, wma, avi, divx etc all on your PC on any Media Center capable PC.
You DO NOT have to put the PC in your living room, you can put it in the den, the bedroom, or the office in my case. You can access this PC with Extender kits either via the Xbox or the Linksys Dual-Band Wireless A/G Media Center Extender. These extenders can recieve and output standard RCA A/V, Component video, and digital audio. The extenders come with a remote so through the extenders people can nagivate through all the media they desire that is currently loaded on the Media Center PC. All the navigation works through a separate Graphical User Interface (GUI), NOT the standard Win XP GUI. From the PC itself, though, you can run the standard XP GUI and do your normal Windows apps and the such.
Here's the setup I'm working on. I am placing the Media Center PC in my father's office. From there I am going to set up an extender to his pimpin' HDTV where he recieves his TV signals. Pipe the cable into the PC and control the recording via 2 tuners one digital and one analog. I will also have an optical audio hook up to his 7.1 Dobly Digital Surround Sound. I am also going to set up another extender for my Mother's TV which is just plain old standard def. So these two telivisions will be access any media that I place on the PC. Both extenders will be wireless capable, but I am placing them on the CAT5 T-100 ethernet to ensure the quickest transfer of media.
The whole concept is pretty revolutionary and quite interesting. I'll let you all know more once I complete my Media Center PC. If anyone has any questions I'll try to answer. Your best bet might be to Google some stuff and checkout
www.microsoft.com