The rankings appear to be like this:
1. USC
2. LSU
3. Oklahoma
4. Michigan

except for the BCS. Because of that, LSU plays OK for the championship and USC plays Michigan to be the bridesmaid. Shouldn't #1 play #2 for the championship?

The BCS rankings go:

1. Oklahoma
2. LSU
3. USC
4. Michigan

Which is why OU/LSU are playing in the Sugar Bowl. Now USC will play Michigan and Kansas State will play whoever.

Right. The AP and Coaches polls are just two components of the BCS system. Sagarin says Miami(OH) is #3 ... should we get upset that they're not in the Rose Bowl?

It is getting clearer (i think) now that I've read a few articles on it.
The BCS contract expires after 2005. Do you think it will get renewed?

Maybe, they're considering having a playoff of the two top bowls next year. If that satisfies the majority of people their contract may get renewed.

It's all about the money.

Right again. Thing, don't get confused about Division I-A. There is no "championship" game regardless of what the BCS tells you. Only the NCAA can provide such a game, and they do not currently sanction the BCS championship game.

If there were a playoff, the only thing we really care about is getting the top two teams in the playoffs. There is no controversy about "but what about #5?" as some people would say if we had a 4-team playoff.

Take this year for instance, if we had a 4-team playoff, the 3 teams that legitimately think they should be in the final game would each be included. Looking at the last decade, no legitimate top-two team would've been left out of a 4-team playoff. In other words, we never ranked a contender #5 at the end of the regular season.