I'm using both Setup 1 and 2. Setup 1 is better than setup 2, but I can't watch TV on my projector, as the projector is connected to the video card.
With setup 1, I can't do PVR.
Here is my Setup:
RF line to Winfast, Radeon 9000 VGA/DVI to projector.
Some channels have way off hue issue. I'm not sure what is "herringbone pattern overlay" mean, but all channels have lines. There is no motion or jerk.
As you mention, setup 1 is better than setup 2, because of the inteference inside the HTPC.