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I built an htpc for my living room the following specs are.
Software:
OS: Windows Xp
Snapstream
PowerDVD 5.0
Various Codecs, Divx etc.
Hardware:
2.0ghz p4
1 gig ddr ram
250 gig hard drive.
ATi 9000 pro All in woder, With ATi Remote Wonder
Hercules Fortisiomo Sound Card
Other Usual Stuff
It seems to do the job quite nicely.
Free software you can try is My HTpc. do a google search for it. Has alot of features snapstream has.
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