Anyone out there thinking about setting up a DVR or some sort of digital recording system for their home entertainment, I would strongly suggest taking a look at Windows XP Media Center Edition 2005.
For less than $300 I managed to turn my 2.8GHz Pentium 4 into a media center PC and can now watch/record live TV, listen to my MP3 music collection, watch home movies from my camcorder and watch downloaded video from the Internet - all from the comfort of my living room with a TV and remote.
The first purchase was a capture card. I am using the WinTV-PVR 150 from Hauppage. This card is supported by MCE 2005 and provides a single tuner input using S-Video or Coaxial connection. I intend to replace this card at a later date by the PVR-500, which boasts dual tuner so I can watch live TV while recording.
The PVR-150 comes shipped with a remote control, unless you purchase the MCE version, which does not. I went for the remote option, hoping I could shortcut the need for a dedicated MCE controller, only getting it to work correctly is proving to be troublesome. I would advice a purchase of the MCE card and dedicated remote from Microsoft.
The expensive bit was the purchase of a new 4x AGP card - the NVidia GeForce FX 5700. My PC was only installed with an integrated graphics card and I needed S-Video out and some power to handle real-time decoding of MPEG2. The FX 5700 provided me with exactly what I needed.
What they don't tell you when you install MCE 2005 (unless you know where to look) is that you need a decoder driver so that MCE knows how to decode live TV from the capture card. Without it you'll receive a “decoder error“ when attempting to watch live TV. My NVidia did not come with decoder software, so I had to purchase NVidia's decoder for an additional $20. My understanding is that any MPEG2 decoder should work with whichever card you're using (can someone confirm this?), however, when I used the decoder from WinDVD I could not skip forward and backward through live TV without the picture hanging. After installing the NVidia decoder everything worked great.
Setting up MCE 2005 was a breeze, it detected my card (make sure you install the MCE 2005 driver first), downloaded the channel guide for my area, and adjusted the resolution for my TV. I managed to show MCE all my MP3 files that were setting on a server in my basement as well as my downloaded TV. Best of all, I can now play home movies of my 13 month old for the in-laws, when they come over, without having to put them on DVD first.
I've not had too much time to play with MCE 2005 (I installed it last night), but from what I've seen I'm real excited about it. I'm planning on playing some more 
Addendum: I found a new decoder driver on Hauppage's web site. I have no idea if it's as good as the NVidia decoder but it appears to be free.