We're researching this for our bathroom and thought we'd share a good instructional at How Stuff Works with you. Installing recessed shelving between studs is a good way to add extra storage space to a room without taking up any square footage.
It's good for the bathroom, as the shelves end up being shallow but can hold small bathroom accoutrements. Or this can be done in the shower and tiled as a niche for shampoos and stuff.
We also came across these 



A couple of things on the shelf in my shower: it collects water along the top edge which cools slightly and then drips on you--brr--and ours has a mildew problem along the back inside edge because water collects there, too.
But I bet this could all be avoided by someone who knows how to tile properly.
Actually the niche should be slightly angled forward to allow the water to run off. Ive found www.johnbridge.com to be a great resource for tile info.
I did a tiled shower niche in our bathroom! I think I did a brilliant job, too, if I do say so myself. The bottom of it is slightly angled to allow water to run off, and the shelves are made of Corian and are removable for ease of cleaning. Using cement board, fiberglass tape, and thinset, I made a box, mounted it between the studs, then tiled. When tiling the sides, I set small pieces of tile projecting out slightly, to hold the shelves. It wasn't any harder than other fairly tricky tiling (like around a window). The really tricky part was rerouting the shower plumbing to go around the box (the box is set into the wall between the shower head and the faucet). But it looks beautiful and is so functional.
Diane,
Your project sounds wonderful; would you mind posting a picture of what you've described so we can have a look? Many thanks!