Rich-
That looks a lot like what is in my garage. I've got "multimedia" outlets in each room with a couple coax outlets, a phone jack, and an ethernet jack. Each line collects at the panel, and should be terminated so that one jack on the panel matches one jack in each room. I had a total of six or seven (small house).
Since the jacks are just connections to the other rooms, you need something to tie it all together to make it function as a network--a switch. Mine is a 10/100 ethernet switch, and has a special "WAN" port for a wide area network (i.e., the internet). So, in my configuration, the switch is next to my patch panel, and there is a short ethernet jumper going from each jack to the switch. I've got a cable modem next to that, and the cable modem connects to the WAN port with another ethernet jumper.
Once you get that stuff done, you should have a networked house. If you plug a computer into one of the room jacks, the switch will see the computer, a low level dialog will ensue between them, and the switch will hand out an IP address to the machine (its a local network address, so you can't use it from other parts of the internet). The switch essentially routes packets of data between ports based upon these IP addresses, and manages communications from/to the WAN port. This allows you to share your internet connection among a number of different computers. Think of the switch as a little post office with a sorting machine inside routing letters to the right address.
I think I said before that I found my panel was not connected up--all the CAT5 cables were in the box, but they hadn't actually attached the cables to the patch panel, so the jacks didn't do anything. Given that its all color coded, it was pretty each to match up wires with the right terminals (8 wires in each ethernet cable). If you have to do this, however, be aware that there is a special little tool for connecting ethernet wires to terminations. That little tool makes the job easy; otherwise its a PITA. You can get the tool by buying any ethernet jack at your local ratshack--it will come with it.
The terastation is interesting, but I agree its pricey. I actually started off with a number of standalone USB drives, but after leaving them on 24/7 for a couple weeks, I started getting read errors and bad sectors. I ended up with unrecoverable data errors on four of five 250 GB drives, and lost faith in consumer drives. I also don't want to re-rip everything again (I've now done all my albums several times).
Good luck.
