PVR/Digital Jukebox Computer

Hi all:

I've been thinking about doing this for months, but the recent Toms Hardware article really got me thinking:
<A HREF="http://www.tomshardware.com/howto/02q4/021109/index.html" target="_new">http://www.tomshardware.com/howto/02q4/021109/index.html</A>

How could I assemble a home audio/video system centered around a PC (instead of CD player, VCR, and DVD player).

The article referenced above put together a 2.4 Ghz Pentium machine with a cost of $1200, that had audio output via Multimedia PC speakers.
Differences between this article and what I'd like to build:
I'd want to use a normal stereo system instead of PC speakers, and just send audio from the PC to the stereo system.
I don't want to be doing much gaming or video editing on this machine. Just enough power to play DVDs and perform PVR functions is acceptable
I don't want to spend $1200, or even $800 on the PC part... I'd rather spend more on the TV screen and upgrade the PC bit by bit over time.

Also, there are concerns that the article did not address that I'd like to ask you guys about... see the "goals" section below... are all of those things possible? What are the tradeoffs? How much quality is going to be sacrificed doing it this way vs. using separate componenents?

Any and all comments are extremely welcome. I especially need advice about the audio system and monitor end of things...
Thanks!

Goals:

Put together a complete digital home audio and video system, based around a small footprint computer, controllable by remote control and/or wireless keyboard/mouse.

Computer must:
Play DVDs, with audio output to stereo system via SP/DIF, video output to HDTV quality monitor
Tune cable TV stations (including HDTV signal) via same means.
Set up recording of TV shows on a schedule or in advance.
Capture TV to disk using PVR software
Play CD Audio
Play MP3 audio, either from hard drive or networked computer drives on LAN
Allow web browsing.
Picture in Picture would be a nice touch.
Tuning local radio stations would be another nice touch.
Playthrough of audio or video from other home components (VCR, CD changer, iPod)

Monitor must:
Support support digital input from computer
Display DVD/Cable/HDTV at high resolution
Display normal computer desktop

Audio system must:
Play Dolby Digital Surround sound from digital SP/DIF in
Switch via remote control to wireless headphones


Components:

Audio:
Option 1:
Any all in one receiver/speaker combination that supports SP/DIF in.
Option 2:
Receiver that supports SP/DIF in, individual speakers.

Monitor:
Many projection TV monitors have washed out color. Flat plasma TV monitors are extremely expensive, some do not show blacks well. Flat screen LCD monitors have small size for the price, and cost as much as LCD computer monitors. Flat screen direct-display TVs have low resolutions, but best value proposition. HDTV ready should be sufficient if computer can act as set-top HDTV decoder.

Computer:
Option 1: Buy a small footprint machine already assembled, or a barebox machine and add any other components as necessary.
Option 2: Build from scratch. Components needed:
Case: Needs to be either a slim (i.e. 1U rackmount server) form factor or compact (i.e. boxy microATX) $50-$120
Motherboard: MS-6378L ? another comparable?
Processor: Athlon xp 2000 $132.00... willing to drop proc speed to the minimum required for DVD/HDTV decoding/playback in order to decrease price
Ram: 512 MB, $100
HD: WD 120 GB
RAID Adapter: Maybe 2 drives in Raid for speed, three smaller drives in RAID 5 for speed and redundancy
DVD Drive: Sony 16x, $40
Networking: Hopefully built into MB
Video card: All-in-Wonder, $118, Visiontek Xtasy Everything 5564 nVidia Personal Cinema Geforce2 MX400, $88
Sound card: SoundBlaster Live! w/ SP/DIF out, $30
Remote control: Included w/ Vid card in most cases.


Questions:

What audio receivers support SP/DIF digital connections from sound card? What's the best deal on audio components, buy as a package or buy individually?

What resolution monitor is going to be needed? What's the best buy.

Can a PC act as an HDTV set-top box? If so, what software is necessary?

How much hard drive space is necessary? Is RAID necessary? I'm assuming that audio over a 10-Base Ethernet network would be sufficiently rapid, but HDTV/DVD quality video will probably have to live on the device for realtime playback.

How much power (power supply) will a computer like this require?