I'm currently building one too. I'm not sure whether I'm going to go with a Linux or Windows box.
I've spent the last weekend doing some tests on an old computer on which I loaded Linux (FC4) and used Xine (media player) to play some DVDs, pretty good quality right out of the box. I was able to set it up on my Z2 with almost no overscan! (a couple pixels on the left side) fairly quickly, I think I can get it perfect if I mess around with the timings some more.
I'm fairly pleased with the quality, the only problem I have so far is getting Xine to display DVDs fullscreen correctly, I still have some problems, but I'm getting there.
The great thing is that this test box is running an old Athlon K7 800MHZ and the video card is an old GeForce 256 and it works great! I was able to deinterlace pretty well without dropping any images, so I can't wait to try it on a newer system.
To me the PQ is better than any Windows software DVD player I've used in the past (though to be fair the last time I've tried one was in 2000, so I'm sure they're a lot better now, with ffshow and pure video).

The reason I'm still debating going with the penguin is because I might want to do some gaming and then it would be easier to run all with Windows, since if I go with Linux I would have to dual boot, which is fine by me (and cheaper! I don't feel like buying Theatertek/Zoomplayer, Meedio/MCE, etc...).

Anyway the Linux solution is a lot easier than I thought and there are enough HD cards that are supported for it to be tempting. I'm thinking about getting a HDPC3000 card, which is designed for Linux, and works great with QAM and ATSC (the only drawback is that it has no support for Windows if I decided to switch... We'll see...).

Anyway if I have time next weekend I'll take some pictures of my screen using Xine to play DVDs to show y'all.