I've got an HTPC that I built with the intention of using if for gaming as well. To that end I got an ATI 9600 AIW, which does all of the required HTPC functions including an FM radio
It also packs enough power to play every game I've put on it. Building a gaming rig for the tv is cheaper than for a monitor because the max. resolution you'll be able to discern on a regular (non-HDTV) is 800x600. So you can effectively run software on lower-end hardware and not have it look bad.
As far as it being better or worse than a console, I think it's always going to be better. You'll always have a larger game selection, and nowadays most games are ported to multiple systems anyway. I bought an Xbox controller to USB adapter and plug an Xbox controller into the front USB port on my case. You can do the same with gamecube and PS2 as well.
I've seen a few products that deal with streaming audio off a network to a stereo, but I don't have any experience with them.