I will admit it takes a lot of time and effort, but even the problems Les H mentions can be overcome.
I will admit to being a total computer/electronics geek. I have an HTPC, and I don't even have my HD set yet. I have been building PCs for years, and I have studies and worked in electronics. For me, building stuff like this is a hobby. I really should take a few pictures of it and post them somewhere...
My HTPC is completely silent. The only way you can tell it's on in by looking at the front panel LEDs. There is no fan noise, because there is no fan. It has a closed-loop water-cooling system all within the case. There is an opening on the top of the desktop case under which the small radiator is placed (I used a tranny fluid cooler for automobiles), and that's the only clue that this is not a normal PC. Even the fan on the Radeon 7500 video card has been removed, replaced by a very large heatsink that dissipates heat passively. The hard drive is a laptop hard drive with a conversion kit for a desktop PC, resting on a piece of foam, so it does not transmit mechanical vibrations to the PC chassis, so it too is extremely quiet. I selected the Samsung 8X DVD-ROM drive especially for its quiet operation, and the inside on the case is lined with thin cork panels for soundproofing. All ventilations holes originally in the case have been blocked, since I'm water cooling and couldn't care less about air flow. The whole system is painted with black enamel and clearcoated to make it look great in a living room.
Sound wise, I use a Hercules Fortissimo II sound card (about 50$US), that has optical digital out. I passes on the raw DD or DTS stream to the receiver. I'm not sure how the quality of such a setup could possibly be inferior to that of a standalone DVD player.
Functionality wise, MY HTPC also doubles as a CD player (again, straight PCM to the receiver) and MP3 music server with many hundred hours of music on it. I can use it to display some really cool visualizations of music on the TV for parties and stuff, picture slide shows, big-screen gaming, etc.
For me it wasn't a matter of cost or time. I just had to do it, because it could be done. As you've probably also figured out, I'm also single, so I don't have to justify the presence of a computer in the living room to anyone by myself ;-) Not to mention the 50+ hours spent building and tweaking the sucker.
Is such an undertaking worth the effort? For 99.9% of the people, not at all. But for the real geek who had to have something really different to show off, it's one real nice piece of work to show off to friends.