You know how they sell old-style gaming systems in little boxes nowadays?
Well, just do the same thing with the PC
-Use the Atom processor, so you don't need a cooling system, and you can run normal x86 apps.
-Make the whole thing a little box like no more than 3"3
-TV out instead of monitor out, so you just connect it to your TV (or, in alternative models, DVI or VGA output). simple graphics, about 2mb, no hardware 3d support
-ethernet port (and/or WiFi in alternative models)
-SSD harddrive, size depending on model - can go down to very small because you might want to use an OS for mobile devices
-DC-in and includes an adapter
-6 or so USB ports, for all your peripherals, keyboard, and mouse. (just forgo the ps/2 ports and any other ports.)
-RAM? Nowadays 1 GB goes for $10, at least for PC RAM. On the downside, for cost, PC RAM is more mass-produced, but on the upside this RAM doesn't have to be nearly as fast.
-main board? *shrug* make something up. this device is meant to be *functional*, it doesn't necessarily have to be super-fast.
-OS? Linux geeks might get a kick out of these, so make a version with linux. Also, maybe one with XP. Maybe even Windows 7, it's pretty efficient. Other considerations: Windows CE, Windows XP Embedded, Google Chrome OS, FreeBSD, ReactOS? (probably not finished enough), Xandros, PCLinuxOS, Mandriva, Aurox (all easy linux distributions)