Personally I would go Hi-Fi/AV seperates. But thats just me. I want kit that just works, is silent, uses as little power as possible - so thats HTPC out of the window. I dont want a PS3 either as already got a 360. Your milage may vary!
Got a Panasonic DMP-BD35EB-K Profile 2 Blu-ray Disc Player here for under £200 and the quality is excellent @ 1080p on a Sharp 42" LCD. Also one thing I have noticed is that normal DVD's look noticably better too so it must do some serious upscaling.
Currently working my way through all my DVD's now just coz they look so damn good!
Got wall-e othe other day on blue ray and that is amazing quality.
Butuz