I don't have the benefit of a new 1080p monitor, but on my 2-yr-old Sony 55" RPTV (which nevertheless, still does a great job w/ HD, btw)...I'd have to say that the two HD movies I've viewed through the Microsoft download service looked pretty darn passable.
No, they don't have quite the punch of my HD-DVD titles. But they sure as hell look better than DVD. It's not perfect HD--but it's HD alright. The VC1 compression, even at 6GB file sizes, impressed me. I only saw artifacting once, and these films ('Poseidon' and 'The Wicker Man') had plenty of compression-challenging material...water, fire, light gradients, flash cuts, etc.
The speed of the download might need some tweaking--but its my ISP that holds some of the blame, I realize, as I'm on medium-speed DSL.
Overall, as I've said, I was quite impressed w/ the service. I'm just hoping they get enough of a positive response that they'll enhance/expand the service...more titles, tweaked encodes w/ mandatory 5.1 audio, etc.