The quality of the DVD experience via an HTPC is dependant on many factors. You have processor power, software player used, and audio card in use. It is also dependant on the type of display to which you are outputing.
I would agree that an HTPC output to a 27" TV via svideo or composite will not have a stunning result. In fact I would venture to say it would look worse than a $129 player.
But a HTPC running the latest version of PowerDVD, output to a HDTV or FPTV via the RGB inputs can't be touched by any store bought DVD player yet. This is including the progressive players on the market. An HTPC has the ability through scaling to display non-enhanced discs better than I have ever seen. In a blind test I am sure you would see the difference on a 100" screen. I know I have on my 53" HDTV! Using a soundcard that has a digital output, the sound, to my ears, is equivilent in both DD5.1 and DTS.
The only problem I have with the HTPC solution is the noise of the fans cooling my Athlon 600. It is distracting with my currnt setup because it is not enclosed in an A/V cabinet.
A reasonably priced remote that could control my HTPC would be beneficial as well.