For any serious film watcher, a home theater is a worthy investment in time and money. While the most complicated home theaters will require a dedicated room, specialized furniture and hiring a certified technician in order to set it up for optimization, none of this is required. With a simplified set up you can get a great home theater that gives you the feeling of being in the theater.
The television is one of the first things that people think of when they think of a home theater. Many people will put as much money into their television as possible in order to maximize the size and quality, but remember that price does not always equal quality. Now a days the choices out there are HDTV's, and they come in two flavors, 720p and 1080p (Full HD). If you are looking at a TV 32 inches or smaller, then the 720p is all that you require. The human eye can not tell the difference at those sizes. Anything larger then 32 inches and you should consider getting 1080p television for improved quality. The technical specs will talk about contrast ratios, and refresh rates as well. Contrast ratios are somewhat meaningless, so you can judge the image quality based on the images you see on the set. Refresh rates do help the image appear to be smoother and have less "ghosting" of the image, so you might want to pay attention to that. Remember to buy a size that will fit comfortably in your room and will not cause eye strain because you have to sit too close to it.
As important as the television is, sound is equally important. A good sound system will make the television seem larger and psychologically add detail to the image. It is a strange effect, but it is a psychological fact. If your budget is small or you think that putting together the actual system would be too hard for you, then a home theater in a box might be right for you. It includes everything you need in order to play dvds/blurays, and the speakers in one package, except a television. They are compact with small speakers, and they deliver acceptable sound with little in the way of confusion. These can be good systems, however, they do have some draw backs. They are not easily upgradeable, and if your dvd/bluray player dies, the entire system might have to be replaced.
Assuming you want to go the component routes, you will need a source (dvd/bluray), a decoder/amplifier (receiver), and speakers. The A/V receiver will be the hub of your home theater, as everything you buy will need to connect though it in order to get sound to the speakers. Depending on the source and the receiver, it will be able to decode various types of surround sound standards (Dolby Digital and DTS being the most recognized). You want to match your receiver to the sources and television you either have, or seriously plan on getting in the near future. Any attempts at future proofing your purchases will certainly fail, so make sure you make the most of your money by buying what you need. If you have a cable box, a bluray player, and a video game system, make sure you have 3-4 inputs so that you can easily connect each of these to the system. If your TV has HDMI inputs, try to find a receiver with HDMI inputs/outputs. If your tv is older and you are not planning on upgrading it, you can find a much cheaper receiver without HDMI and you might want to save your money and get one of those.
If you have a HD (720p or 1080p) set up, then you want to get a bluray player for your home theater. Once you've made the leap into HD you will want to make sure you're getting what you paid for. DVD's are great, but the higher quality these discs offer are worth the extra money. They add more detail in both the sound and the visuals, and get you even closer to the film experience that a good home theater should strive for. If you are going to stick with DVD's, then your receiver will need to decode Dolby Digital EX 6.1 and DTS ES 6.1. If you are going to make the leap to bluray, the receiver should be able to decode the more advance codex, including Dolby Digital True Master, and DTS HD Master. Again, you want to get components that will match what you plan on having in your home within the next year. Technology and price drop dramatically in that time, and trying to buying for too far in advance will wind up costing you more now and still not work with the future technologies.
Finally, speakers come in all range of shapes and sizes. Their prices also cover the entire range. In order to find the right pair of speakers bring a cd that you know and demo it in the store. Try to find a place that will let you listen to your cd or movie on various speakers playing from the same cd/dvd player. This will allow you to hear the differences between the speakers and help you figure out which one works for you. If you can't hear the difference between a 100 dollar speaker and a 500 dollar speaker, you might want to go for the cheaper. You're not trying to impress your friends, you're trying to maximize your enjoyment. Just make sure the demos are at what you'd consider a normal listening volume and then a little bit louder then that.
Finally, save some more money by getting a Netflix or similar account, and enjoy your home theater with a seemingly never ending supply of movies. Just don't be too upset when in a year or so the next big thing comes out (3D anyone?).