Although Apple's included Front Row software is adequate, MediaCentral takes the definition of Mac home theater to an entirely new level. MediaCentral (US$29) is a Swiss Army Knife media center application from Equinux (of iSale fame) that plays virtually any media format.
Hook it up to a Mac mini and a plasma display and you've got a killer Mac media center setup. MediaCentral will play back everything from IP TV, to online clips (from Google Video and YouTube), to IPTV, to movie trailers. Oh yeah, and it plays just about every other media format on the planet, including VIDEO_TS folders (locally or on your network), AVI, DivX, DV Files, Xvid, MPEG1/2/4, DVD, MP3, AC3, Internet Radio stations - and the list goes on.
And the icing on the cake is the beautiful user interface. It's very dark and unobtrusive and extensively uses the mirror reflection effect popularized in Keynote 3 and iChat video conferences. The MediaCentral UI is responsive and has subtle sound effects that don't annoy.
If you paired up MediaCentral and Apple Fan Boy's mockup of what Apple's new media center hardware could look like - you'd really have a killer app. Apple, I hope that you're paying attention!