I used to be a mod over at the official WB Harry Potter forum, and we had severe problems there keeping the NC-17 HP fictions off the board.
I think there's things to be said for and against fan fiction. I'm not really one for reading it, or writing it, but some of what I've seen is really good; a lot of the writers are obviously very talented. There was a woman who wrote Xena fan fic whose work was so impressive that she was actually asked to write several scripts for the last couple seasons of the show....so there is definitely legit, good, readable stuff out there.
That being said, there's tons of crap out there too, and unfortunately enough I think it kind of outnumbers the good stuff and subsequently gives the entire genre a bad rap.
I'll probably never like reading it, but I think so long as it doesn't get too Mary Sue-ish you're cool....decent spelling and grammar helps too
Just as an aside, if anybody has ever read the book "Mortified" (which is basically just a collection of people's really pathetic and lame journal entries/poems etc. written when they were kids) there is a positively HILARIOUS Duran Duran fan fic in there...yeah, Duran Duran. You'd have to read it to believe it.