I've been using a Mini for this for a good 18mths now.
DVI-HDMI cable to my Pioneer plasma screen.
Optical digital cable to my Sony surround amp.
Mini is connected via gigabit ethernet switch to a NAS (ReadyNAS NV).
I use Media Central for the menu software. It's very configurable and will play most (pretty much all) formats, including raw VOBs from TS folders ripped from DVDs (all stored on the NAS).
Simple menu interface and simple to configure.
The key item with all these systems is how you control them.
iRed and IRTrans are crucial here. You plug the latter into your Mini's USB port. It then acts as an IR receiver AND transmitter. iRed (the software for it) then lets you learn other remotes and do all sorts of stuff on receiving remote commands (run Mac scripts, send keyboard commands, send IR signals from other remotes etc). It's very powerful.
I have mine set up so that I simply use the remote that came with my TV and it not only controls the TV, but also the surround amp and the Mac Mini's Media Central menu system.
End result? I can turn all components on and off using the one remote. The surround amp controls all sound. I watch TV as normal for the TV but if I want to watch movies, listen to music, listen to internet radio, look at photos etc I flick the TV to the Mini's input and away I go. All from my armchair.
Even my folks and other half can use it it's so easy.
It's also very reliable, which is important. Occasionally I get a slight menu bar line at the top of the screen when the Mini gets confused with mouse focus, but it's easily addressed (bluetooth keyboard or VNC to the machine). And the equipment cupboard I have can get quite hot and trip the Mini out (cooling fix due to the cupboard soon

). Other than that, the only errors are user ones.
There are only really a couple of things I wish could be done better:
1) iRed doesn't handle repeat IR codes very well. So scrolling through long lists of DVDs etc can be a pain as it doesn't exactly emulate a keyboard (which accelerates through a list).
Partially overcome by splitting films into genre lists, but would be nice to have better repeat codes.
2) The menu system doesn't look as slick as Front Row. Sooooo much better in every other respect. Front Row look and Media Central functionality would be perfect.