The primary component of a HTPC set up is the PC itself. The primary objective is to get audio and video out of the PC onto your display and speakers. There are a multitude of ways to do this. The Wikipedia article on HTPCs gives you an array of options to get the video out, but no mention is made of the way to get the sound out (at least, the version on Wikipedia as of 20th Aug, 2009).

There is no point in going forward with legacy connections like Component, Composite, S-Video etc. which do not support Full HD (1920x1080 resolution). So, if you see any graphics card for your HTPC which support those connections, remember that your hard-earned cash is going to go towards supporting people with legacy equipment. If you are not one of them, you are better off getting a card without those connectors. In my opinion, VGA is as far back on the legacy scale that I would go while checking supported outputs, while shopping for a graphics card. Hence, we are left with three options, namely,

  1. DVI: The DVI standard was brought about mainly to serve computer monitors with much higher desktop resolutions than what VGA supports. As such, it is not meant for TVs (which are the usual video display units for HTPCs). TVs rarely advertise the availability of DVI inputs. The main advantage of DVI connections is the fact that the resolutions output on them can far exceed 1920x1080 (can go up as high as 2560x1600). One of the variants of DVI can also carry audio but using DVI in a HTPC is fraught with issues. My suggestion would be to avoid using DVI connections completely for this purpose.
  2. HDMI: HDMI is the de-facto standard for AV communication between most consumer devices (camcorders / Blu-Ray players etc. and TVs). Unfortunately, it is not royalty-free, but it got accepted into the market much earlier than the competing open standard (DisplayPort). Millions of devices have shipped with HDMI in them, and it is not possible to turn back the clock. As of now, there is no better alternative to using HDMI for our AV needs in a HTPC. HDMI 1.2 could only support upto 1920x1200, but HDMI 1.4 (the specs of which were released in May 2009), can support upto 4096x2160. It is good to see that HDMI is keeping up with the times. However, as of now, we do not need to worry much since there are no commercially available and affordable TVs which go above the 1920x1080 resolution.
  3. DisplayPort: The most interesting option is the DisplayPort. It is royalty free, which means lower cost for the consumer, but it got into the game later compared to HDMI. Hence, its adoption rate is low. It also supports audio. At present some high end Dell monitors support DisplayPort, but no TVs as of August 2009 support it. Hence, for HTPC purposes, it is best to stay away from DisplayPort.
Weighing the pros and cons, we can safely reach the conclusion that HDMI is the way to go in order to get video out of your HTPC.

Most motherboards have inbuilt audio nowadays. Depending on the output availability, the following methods can get the audio out of your PC:
  1. Analog Out (2 - 8 channels): These are the PC outputs which can be directly connected to computer speakers. The digital sound (in terms of 0s and 1s) inside your PC undergoes digital-to-analog conversion with chips inside the motherboard / sound card. The quality of the DAC chips decide the cost of the card / mobo. HTPC enthusiasts usually don't trust these DACs, and that is the sole reason why it is preferred to get the audio out from the PC as a stream of bits (digital audio). It must be kept in mind that costly soundcards have high quality DACs inside them, and the analog audio out for these are usually fine by HTPC standards. However, there is a very valid reason to avoid these add-on cards (dependent on other components of your HTPC)
  2. SPDIF Out: This is a way to get the digital audio out of your PC. This means that the conversion to actual sound takes place in some other component of your HTPC outside the PC. Almost all AV receivers have a SPDIF input and the PC output can be connected to this. The speaker wires then run from the AV receiver and then onto the actual speakers. The DACs to convert digital audio to analog are inside the AV receiver. There are two types of SPDIF connectors (as mentioned in the Wikipedia article), namely, Coaxial and Optical. Since AV receivers can process multi-channel sound, SPDIF can be used to transmit 5.1 channel digital audio also. SPDIF is preferable to analog out, since the HTPC enthusiast has more control over the quality of the DACs which provide him with the sound.
  3. HDMI: Well, we encounter HDMI again! HDMI provides for digital audio transfer similar to SPDIF, with the advantage that it is part of the same cable that carries the video! This minimises cable clutter at the output of the PC. However, there is a downside with respect to the fact that the HDMI receiver be able to understand the audio signals coming through. The HDMI cable from the PC's output can be directly connected to your display's HDMI input. If you are connecting the HDMI cable from the PC directly to the display, you will have to make sure that the sound output through the HDMI is stereo LPCM (or, in layman's terms, completely decoded digital sound with only 2 channels). Multi channel output connected to TVs do not really make your HTPC experience any better. A home theater evokes images of surround sounds where you get immersed in 5.1 or 7.1 channel surround sound with speakers all around you. To get this, the HDMI cable has to be routed through a AV receiver. Many AV receivers boast of HDMI inputs and outputs. Do not get misled by this marketing hogwash. Read the fine print of the AV receiver's specifications, and make sure that it is capable of decoding / processing sound on the HDMI input. In most receivers, the feature to decode sound signals on the HDMI input is termed as the 'repeater function' in contrast to the 'pass-through function' where the signals appearing on the HDMI input are transferred unmolested to the HDMI output. If the AV receiver is a repeater, the HDMI output from it is video only. This video is then displayed on your TV and there is no need for the display to process sound. The sound is routed by the AV receiver from the HDMI input and onto the speakers after the necessary processing (decoding / digital to analog conversion).

The perfect HTPC set up would utilize HDMI for transferring both audio and video out of the PC.