Well, the PS3 does upscaling too.  From what I've seen it dramatically improves the quality on an HD screen, but only from what it would have looked like without upscaling.

The point is, you need it otherwise you start noticing all the artifacting etc in the DVDs.

Even on the 32" screen I think the difference is somewhat noticable from what I've seen.  1080p is fine if you have Blu-ray, HD-DVD doesn't support it.  There's reason to believe some upscaling can look better on 1080p sets as well, but this is not conclusive.

The important thing with LCD TVs is often that the 1080p TVs may also be able to show pictures in their correct frame ratios, so they look smoother.

As the biggest problem with LCD is showing fast movement, this is fairly important, as is any technology which counteracts this.

I'd personally recommend the Sharp XD1E range, also 1080p.  They constantly outshine the other makes in reviews and I've compared them in the shops with both standard and HD sources, they seem to come out on top, with Sony about equal.  A new 32" XD1E model also got reviewed in What Plasma and LCD mag last month with top marks.