The reason I'm here asking for help is because this is my first true home entertainment dedicated PC project.
I need opinions!! and some hardcore help with Linux distro because I cant do this on my own.

I have narrowed down my choices to this hardware setup:
Hitachi 1TB HD
BIO STAR G31-M7G DVI MAINBOARD
Intel E5200 CPU
2 or 4GB RAM
HD4350 512 MB Video Card
32-42 Inch TV/LCDTV?
basic case dvd/cdrom.etc
Is there a way to make this as wireless as posible? remote control ish?
(AM I MISSING ANYTHING?)
For software Linux wise I am only familiar with UBUNTU (GASP)

The computer should do these functions when complete:
1)Stream IP Based Television and movies
2)Become the free VOIP server
3)Main Sound system (Many speakers)

First I need opinions on the hardware setup (compatibility, is anything to much or is anything to week-Wrong?)
The Television provider is IP based, downright 50 channels and tons of movies in Russian for 40$ a month.

I have the impression that ATI is better suited for HD MOVIES and N-vidia for Game's so to make sure its 100% HD twinks worked out I went for the 4350 (512mb)
Hard Drive....100$ (EXTERNAL) -> Do I even need a Hard drive?
RAM- Is 2 gig More then plenty for HD movies on say a 40 inch screen?

Now the BIGGEST QUESTION!!
What Distro Should I use? will Ubuntu be a pain with this GNOME or not?

I need something rugged and functional

Can any one help with any part of this?
Maybe some one can share their already working system setup with me?

While ATI's support has gotten better in the last (1-1/2?) years, Nvidia's support is still much better (for Linux). ATI did a great service to Linux by making a big deal about starting to do video decoding with the video card (mpeg, x.264, etc). While their effort seems to have pretty much stalled since the first of the year, it did put the spurs to Nvidia's VDPAU program. Unfortunately VDPAU will only be supporting series 8 and 9 cards.

Fortunately for you the cpu you have chosen is more than enough to decode most codecs. For 1080p your card MAY be a little short on memory. Hopefully your card has HDMI output as it greatly simplifies doing surround sound. Make sure your TV has at least DVI inputs (preferably HDMI). For anything over 40" make sure the TV is 1080p(not just 1080i).

I would skip the external drive unless you need it for backup purposes.

For just playing videos 2GB will be fine (1GB would probably be fine). On the other hand memory is cheap right now.

The number one thing people building there own machine screw up on is power supplies. These days Seasonic is about the only brand I will buy. I had several machines with other name brand PSU (antec among others) that I could not figure out what was wrong(general goofy behavior). Put in a Seasonic PSU(same wattage) and all the strange issues just went away (permanently).

Thank you about the 1080p not 1080i tip, and about the video memory, I will surly go with nvidia 1gb 8-9x.
the power suply issue sounds refreshing, I will definitely look into it.