Best place to start when upgrading?

Boat, the first step is to determine where you want to go with your system. Are you looking perform a modest upgrade, or do you want to completely transform your current setup? Once you make this determination you can then realistically come up with a budget.

Regarding home theater, I am of the opinion that the picture completely overshadows the sound. If I were putting together an HT system I first would focus on the video. For my taste a 27" monitor is too small and an upgrade to a 35/36" would reap big benefits. Also depending upon your viewing habits a center channel may not be required. A center channel is used to fix the sound at the monitor for off center-line viewers. If that's not a factor in your house, then skip the center channel and spend the money on better main (front) speakers.

The mag Stereophile for HT has had an ongoing series of articles about how to construct a PC based DVD playback system. As a practical matter there's no reason to store DVDs onto computer hard disk. Due to the storage requirements it's not very efficient. If all you want to do is setup a computer based music jukebox, then do a forum search for "i-tunes". There a thread where I describe the system I put together. It's not difficult to do, but there are a number of different approaches.