Strangelove has it right. A peltier is a device that consists of a material that conducts electricity in a special manner. This conductive property causes one side of the peltier to attract enormous amounts of heat, leaving the other side cold as ice. This is a great cooling marvel, and can be found in some of those electric ice chests that coleman makes. It is extremely important when using a peltier to have adequate air circulation. You need to take all of the heat that you're taking off of the processor, and get it away, and out of the case.
I'm looking into a peltier myself, but I'm looking around for the condensation issue...I hear it's a killer. I'll post again if I find anything you might want to know.
As for water-cooling kits: If you're real good working stuff like that, and certainly if you're comfortable rigging up your own kit from parts out of a hardware store, then go for it. Personally, I'm pretty good with my hands, but I'm not willing to risk a $1000 box on them. If I were to go watercooling, I'd definately buy a kit that someone else had sized and fitted already.
I'll get back to you on the condensation bit if no one gets to you first.