I like to use iTerm for my terminal sessions because of its tabbed session interface. My preferred shell is bash. You can customize the title of each of your iTerm sessions either manually, using AppleScript, or with iTerm's bookmarks, but I like to let bash do it dynamically using the PROMPT_COMMAND variable. Create or edit the .bashrc file in your home directory and place the following line in it:
export PROMPT_COMMAND='echo -ne "\033]0;${USER}@${HOSTNAME%%.*}: ${PWD/#$HOME/~}\007"'
(That should all be on one line.)
The PROMPT_COMMAND holds the name of a program that is executed each time bash prints your command prompt. In this case, it is executing echo and having it send the escape sequence that sets the title bar text. The title bar and the iTerm tab will be set to your user name, the machine's host name, and the current directory. If the current directory is your home directory or a sub-directory beneath it, it will appear with the tilde notation. This works it Terminal too, but it's especially useful in iTerm when you have many tabs open.
export PS1="[\u@\h \W]\\$ "
[robg adds: I haven't tested this one...though with the apparent arrival of the bash default shell in Panther, I guess I should!]
Mac OS X Hints
http://hints.macworld.com/article.php?story=20031015173932306