Pros: smaller footprint, easier cable management, industrial look
Cons: expensive, usually noisy, industrial look
I just started a rackmount migration myself - my router/firewall is the first step, and almost completed. The main server, a new server, 3 lab machines, and the desktop will follow, in no particular order. After I get the next piece done I'll probably buy the rack itself, and start consolidating. It would be great to go all at once, but just too expensive right now.
I wouldn't quite say that a rackmount is "just a different case" though. That's pretty much true for cases 3U and up, but the smaller 2U and especially 1U cases require some considerations that you don't need to deal with for towers - stuff like low-profile memory and heatsinks, non-ATX power supplies, riser cards, and weird fans. Fortunately, spec pages for rackmounts are pretty specific. So you definitely want to do all your research ahead of time. You don't want to get a half-full rack of machines for $$$ and then realize that the others aren't going to work the way you expected.
If you can stick with 3U/4U units, that makes life easier - anything 3U or larger takes standard-height PCI cards, standard ATX power supplies, and should have lots of 80mm or 92mm fan mounts. Unfortunately, there aren't a lot of 3U's out there compared to 4U's. And if you have a lot of machines in 3U/4U cases, you're going to have to get a huge rack for them. Another good spot for cases is
ServerCase.
1U or 2U cases solve the space problem, but like Garion said, they're designed for raw functionality, not silence, compatibility, or good looks. They can be used, though. My router is 1U and fanless, dead silent. It uses a Via Epia board with a 533MHz Ezra, DC/DC converter for power, sits in a (IMO) svelte SuperMicro SC512L chassis, and still squeezes in 3 Ethernet ports - 1 onboard and a dual Intel Gig NIC on a ribbon-riser. Pretty cool, I think. But even after a lot of research and a fair bit of cash on parts, I had to do some dremelling and rewiring to get everything in place. And while it should make a fine router, it's way too slow for use as a typical desktop. I'm planning to build a similar box with the 1 GHz Nehemiah for a web/mail server, but for the other machines I'll need 2U or 3U, otherwise the cooling and noise will be impossible to deal with.
Anyway, I'll stop babbling - you can PM if you want lots of gory details. But definitely research, research, research before you spend a dime.
edit: typo