I have finally found a solution that works for me (and the wife!)!!! Only took me about a year of trying various software packages, hardware solutions and reading for hours on end.
Honestly your own mileage may vary as it depends on what you need in your own system. I am kind of picky with my media, I want it as small as possible but as close to HD as I possibly can get since I am spoiled watching blue ray movies.
I will include links to anything I use, or any technologies I talk about to help others to configure their systems and also as somewhere I can keep all this info if I ever lose it. ;-)
Here is my current setup:
I have a Unix server in my house running Ubuntu, this server has Mediatomb running on it, and pyTivo. Whenever I buy a DVD (soon will put a BlueRay player in my box so I can rip those too) I place it in the drive, and use Handbrake to convert it to the listed preset "PS3" (MP4) format and put it on my media server. This way when the kids want to watch it, they don't scratch the disk, or the two year old doesn't use it as a flying saucer and destroy the movie. I can pack the movie away in a box, and stick it in the garage. :-) It seems the preset I talk about above is a really good mix of having AC3 full surround audio, with good quality video, for a small footprint on the hard drive.
The media server has two one terabyte drives using Ubuntu's built in Raid mechanisms configured as a mirrored set. So 1 usable terabyte but I wanted redundancy so I won't lose all this hard work. ;-) This has become a central storage of all my media in the house, all kids DVD's are located on this computer, all our DVD's, our home movies made HD video camera, photos and MP3's from iTunes.
I then have 3 regular analog TV's in the house, each one has a Tivo on it (PVR) that allows for network access. I don't have a PVR from Comcast, DirectTV or even my own cable company Advanced Cable Communications because they don't allow the network capabilities. This way I not only share programs recorded on one with the others but it also can download programs from my media server through pyTivo. The Tivo is REALLY easy to use and I have the same problem most guys do, if it's not easy to use.. the wife will complain until I replace it or make it easy, and life will not be pleasant until such time. This setup makes for marriage tranquility. :-) Once I get HD cable, which I haven't cause my cable company has been a PITA on upgrading my line to support it, I will get an HD Tivo for the living room so I can support streaming HD content to it as well.
I then have a big screen 52 inch Sony KDL-52W3000 LCD in the living room that has a PS3 on it. PS3 serves the media from the media server in HD to the TV. It handles the wide aspect ratios and such, and also can handle the higher quality stuff. Not only that but the PS3 does a superb job of upscaling anything that might be of low quality (some of the DVD's I own are rather old and not that great) so playing it through the PS3 actually makes the picture look a lot better.
I also have my 7.1 surround system connected to the 52 inch listed above, although right now it's a 4.0 setup. :-) I don't have the mid channel or the sub yet for it, have to save up since I bought a nice system and I had to buy it in parts. My reciever is a Denon 1909 and I paid a lot less than the listed price on their site. For speakers I am using the Klipsch Reference Series currently with 4 RSX-4 models, next purchase will be an RCX-4 and probably will get an RPW-10 sub. This will bring me to 5.1 and then I can look at picking up a couple more RSX-4 models to fill it out to 7.1. Also noted that I didn't pay anywhere near list for those speakers either, I paid a lot less than half the listed price on some going out of business sales.
Hope this helps someone in their decisions, I am always open for discussions about your system setup, drop a comment and I will be happy to answer you back! Would love to hear about other setups that still facilitate the same functionality.