That's a great question, one of the first I asked when I got introduced to Buddhism...
You will probably hear many viewpoints on this forum, but my own opinion is that a shrine is a wonderful although not totally necessarily component of practicing Dhamma...If you can afford some ornate shrine and it means something to you, that's great. If you're not of a ritualistic mindset, then forget it...let me explain...
As laypeople, we are inundated everyday by messages that go against Dhamma...music, books, TV, movies...so much of modern culture (both East and West) promotes values that are clearly non-Buddhist. That's not to say that I'm against music or TV or anything, I very much enjoy these forms of media, but I also find it necessary to once (or twice) a day take an hour or so to reflect on what's [i]really[i] important in life...the values that really do matter. At some point it's nice to be able to shut off all the noise and quieten the mind. My shrine functions in this capacity for me. It's nothing ornate - just a Buddha statue, flowers, incense and candles. I do some chanting and then meditate. On Uposatha days I spend more time in my little shrine area, studying the Pali Canon and meditating longer. The idea is that you have a quiet room or corner to step back for a little while and re-focus your mind on Dhamma. The Buddha statue and all of the accouterments really only serve as aids to mindfulness, and to point to the bigger Truth that lies behind reality. Also, while Buddhist worship is not directed at some all-powerful God, and the Buddha statue doesn't actually make use of any of the offerings, it's still a good thing to remember that passage of the Dhammapada that extols the merit of "worshiping those worthy of worship", and as laypeople so much of our practice is devoted to merit-making it seems.
I'd check out Bhikkhu Khantipalo's little booklet "Lay Buddhist Practice", which gives more details and explanations about the shrine room and it's functions. You can read it here:
http://www.accesstoinsight.org/lib/authors/khantipalo/wheel206.htmlMetta
Josh