I've got a HTPC I had a pic around here somewhere. Basically it's a Dell GX 260 small form factor, 1 GB ram, 2.35 Ghz P4, 80 GB drive, half height firewire card (400), a half height NVidia (128MB??) 5200 dual output card running Windows XP Corp. It's running a DVI to HDMI cable to my Sony 52 inch RPTV. I Y'd the audio output to my old Kenwood stereo reciever and to the TV. When I have parties I load up WMP11 and load in a few playlists, turn the TV off walk away. As soon as I upgrade my home reciever I'll get a UDB Dolby Digital passthru device, Turle Beach makes a few. I have a nifty ATI remote for it too, I can fast forward, stop, exit, etc all from my couch, it has a bunch of programable buttons too. As for the video, 1080i is jerky, I'm not sure if it's the drive speed/cache, the speed of the ram, the CPU, video card or what, 720p works fine though. There are HD newsgroups that have HD content, mostly ripped from moded DISH/Cable boxes, that's where I get all mine. I've tried different DVD playes (Zoom Player seems to the best), NVidia Pure Video apps, the latest NVidia drivers, NVidia DVD deocder, different splitters, different MPEG2 decoders, etc, still no acceptable 1080i. I did get a 1080p h.264 video to play with some stuttering, so far I haven't been able to get my hands on a 1080i h.264 test file, that may or may not work on my system. The Incrdibles in 720p h.264 looked awesome, the kids loved it. My 1080i movies look fine at 720p, I don't notice much of a difference.
Another use of the HTPC is to use it as an upconvert DVD player. Several filters exist for Zoom Player and alot of other third party DVD players to increase sharpness, color balance, etc, supposedly this makes a HUGE difference in DVD playback. I'm still goofing around with it as my real DVD player is an older RCA MP3 non progressive model that I'm looking to replace.
(mods: if some of the stuff I said is 'illegal' here feel free to edit/remove the post)