I have a LCD-driven 55" rear-projection HDTV by Hitachi, which accepts 480p, 720p, and 1080i. Its native mode is 720p, but somehow, the picture is just a *little* bit better when I feed it 1080i signal. We just got a PS3 yesterday, and when we set it up for 1080i output, it looked really good and I have no complaints. It certainly didn't demonstrate any slowness or softening compared to my Toshiba HD-D2 HD DVD player. I consider them pretty much equal in picture quality; eventually with the downloadable upgrades, the PS3 may surpass it. On the other hand, my 720p TV may have trouble revealing the difference.
Anyway, at $399 for an 80MB PS3 and having added Blu-ray to my Netflix profile, I'm very satisfied.