As you might expect, the answer to this question is: It Depends.
First, lets consider HD DVD:
All HD DVD players on the market right now max out at 1080i, even though the media (discs) have 1080p content. Unless you are fortunate enough to have a VGA input on your TV, then supposedly you can get 1080p out of the external HD DVD Add-on for the Xbox 360, should you have one. I already had an Xbox 360, so it was almost a no-brainer to drop the $200 on the add-on to join the HD DVD movement. My TV is vintage '99, so component-only for me ... and YES, there is a fairly good improvement in both video and audio ... not to mention the cool new PIP and special features they're beginning to pack into this format.
Now for Blu-ray:
$1000+ cost aside, and video transfer problems aside, these units from Samsung, Panasonic, and now Sony all do 1080p, as I understand. I have not yet tested these out, so cannot vouch for any in particular. As such, the picture quality should be even better than what I'm seeing through my 360. I will not comment on whether it's worth the extra $200-$500, as I have not personally seen how Blu-ray looks on my TV ... yet.
And if you're hoping the PS3 is your low-cost solution to getting in on the Blu-ray market, tread carefully. If you have an older TV (like me) you may not be getting HD out of this player. If the source content is 720p (like all current games and some movies) and your TV does not support 720p display, the video will be downconverted to 480p, NOT upconverted to 1080i/p. I don't have many details, but have heard that Sony has confirmed this problem.
As far as 720p vs 1080i vs 1080p, that depends entirely on your eyesight and how close you sit to the display. You really just have to judge for yourself.
Bottom line: In my opinion, definitely worth $200, probably worth $500, not (yet) worth $1000+
Hope that didn't confuse too much.
- Shane Sturgeon