I've had a HTPC for about 4 years now. Same idea as yourself with wanting it to replace VCR, DVD player, CD player, etc...with that said, here's what I've found works well for me...right now, my HTPC is channeled thru the receiver just like any other component, just as the cd player, VCR, and DVD player used to be. I was able to successfully integrate the HTPC and remove the clutter of all those components, now my media center is just the TV, receiver, CATV box, and the HTPC...gigs of space is good, segment the drives in a way that makes the most sense to you, I've got one 250GB drive just for mp3's, another 250GB drive just for encoded DVD's and TV shows recorded ala PVR, you get the idea...since the sound is going to be jacked thru the receiver, I highly recommend an M-Audio 7.1 Revolution or Audiotrak Prodigy 7.1 for the sound card rather than any Creative product or onboard sound. The M-Audio and Audiotrak support digital coax and optical directly out the rear of the card whereas Creative requires that effed up break out box. The fidelity and quality of the M-Audio and Audiotrak is superior and use the VIA HTS ENVY chip for audio processing whereas Creative uses proprietary chips. The only real advantage that Creative has over the other two is the CPU utilization and THX support. However, sound quality and fidelity is far more important than saving a few clock cycles and having THX (THX isn't worth it IMHO, not compared to 7.1 or DTS), just be sure to have nice 7.1 surround sound home theater style speakers to really hear it, otherwise your fancy HTPC will be as useful as a 10ft dick...which leads me to your CPU of choice, by all means go with a dual core proc (X2 4400, X2 4200, or Opteron 170) or with a dual processor machine (Athlon MP or Opteron), choose a CPU of at least 2GHz, this will be fast enough to do what you need, and having dual core, the clock cycles used by the sound card will be the least of worries, don't overclock, just buy a cpu fast enough for your needs...4GB of name brand quality memory will be more than you'll ever use, get something with at least CAS2.5...a 512MB video card is overkill unless you plan on using th machine for hardcore gaming as well, a 128MB mid-range ATI All-In-Wonder would perform nicely and be good for moderate gaming, or even a 256MB model for more eye candy, I do not recommend nVidia for use in a HTPC, ATI offers a better solution for the HTPC...DO NOT run WMCE as the OS, go with XP Pro for full admin functionality and networking capabilities, assuming you'll want to network this machine and stream audio and video to other pc's in the house...lastly, think about exactly how many tasks you'd realistically ask this machine to do, will you really encode a DVD while recording the South Park or Simpsons with the PVR? Will you really be surfing the web and playing MAME at the same time? Will you really be authoring DVD's while downloading warez from the groups? Think about how you will be using the machine, not what the machine could possibly do, and make your hardware decisions based on your realistic usage needs, it will save some headaches and some money too. Most of all enjoy!
PS - FYI, my HTPC is not the same machine as in my signature. That's my production server and gaming machine... 😛