http://www.dvdhometheateronline.com/upconvert-dvd/
Is a blu-ray picture as clear on a 1080i television as an HD upconvert DVD player or better?
It depends on many things. Under optimum conditions the Blu-ray image will look better than upconverted DVD, but in practice the degree of difference, and whether you will notice it, depend on the size of screen, quality of the video processor in the HDTV, viewing distance, quality of the upscaling DVD player, and the movie itself. If you watch on a small screen (say, under 37") or from beyond optimum distance (See link for discussion) there may be a difference but it won't be significant.
Keep in mind that 1080i HDTVs are really 720p HDTVs since the number of pixels on the screen (the real measure of potential resolution) is usually 1366x768 (vs 1920x1080 on an a 1080p HDTV).
This means the Blu-ray image has to be downsampled (from 1080p to 720p or 1080i) to display on the 1080i HDTV. On the other hand, an upconverting DVD player has to scale the 480p image on the DVD to 720p (or 1080i). Neither is ideal and which looks better will, as I said, depend to a great extent on the video processing quality.
To further complicate things there may be noticeable differences between different settings. For example it may matter whether the HDTV is fed a 720p or 1080i signal (since it will determine which device -- the DVD or Blu-ray player, or the HDTV -- does the video scaling/deinterlacing.
Keep in mind that Blu-ray also offers the potential for superior sound, assuming you have the equipment to benefit. On the other hand Blu-ray is -- and is expected to remain -- more expensive than DVD (and DVDs are not going to disappear any time soon).
Personally, unless the absolute best video quality is important to you -- and you are willing to pay premium prices for Blu-ray disks vs DVD -- I'd pair a medium range ($80-$100) upconverting DVD player with a 720p/1080i HDTV. I'd only buy Blu-ray if I intended to upgrade my HDTV to 1080p sometime soon and/or the advanced audio formats on Blu-ray disks are a priority.
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