I've had this dilemma for months now. I am right at the point where I was planning on upgrading my hardware and TV to create the "Ultimate Movie Room". These plans started a year ago before the specs were fleshed out for HD DVD and BluRay.
Once I heard how crippled all of the HD movie hardware/software was going to be, I knew that I couldn't support it. Not to mention the BetaMax vs. VHS style war going on with the two different formats. So I started looking towards alternatives that would yield comparable results and this is what I came up with.
First I needed to decide where I was going to put this stuff. Instead of creating the ultimate movie room, I scaled back a bit and decided to upgrade the system in my family room. Once I knew where I was going to upgrade, now I needed to decide what to upgrade.
First the TV. I love the small form-factors of plasmas and LCDs. I know that I could get the best bang for the buck with a DLP but I loose some of the "sleek factor" there. So I started my search for a Plasma or LCD. I ended up on the Philips 42" Plasma with Ambilight. 42" is about the biggest TV that will fit in my space but you could easily replace this size with something more fitting for yourself. The thing that is important is the inputs/outputs on the back and the overall resolution. In my opinion, 1080p (or 1920 × 1080 resolution) is overkill right now and since I know I am not going to buy a BluRay or HD DVD player any time soon, I decided with a TV that is 720p/1080i or 1366x768 resolution. The Philips has 2 HDMI inputs and an audio output (somewhat uncommon for these TVs for some reason). The HDMI cables allow me to get 1080i signal. I spent about $1300 for the TV.
Next is the audio and DVD solution. Since this is going in the family room and having rear surround speakers wasn't an option, I wanted an all in one solution that output some good sound. It was also important that the system up-convert DVD from that standard 480p to 1080i. This usually means it has to have an HDMI output. The final requirement is that it had the Faroudja video processor. My understanding from most of the AV nerds out there is that this chip does the best video up-conversion on the market. So I settled for the Denon S301 system. It has great sound, HDMI connection, up-converts to 1080i, uses the Faroudja chip, and even has a USB and iPod port on the front! I got this open box from Best Buy for around $1000.
Now that I have the TV and Stereo/DVD, I needed the cables to hook everything up. Seeing as I was at Best Buy, I decided to pick up the cheapest HDMI cables they had. 2 x 6 feet cables cost me $140. WOW! What a rip right? Exactly. So I went online to find cheaper/better cables. I found a site that sold HDMI cables for $17 each and were 2 to 3 times the thickness of the "cheapie" Best Buy cables. A quick search on google.com and you're set. So 2 HDMI cables cost me about $40. The thing to note here is that it is a digital signal and unless you are trying to pass that signal great lengths, it doesn't make a difference who makes them. The $200 Monster cables work just as well as my $17 generic cables...especially over such a short distance. Do yourself a favor and don't waste your time on the "better" digital cables, they are all the same.
The final thing you want to do is get a new cable box or DVR. Chances are that you box has been sitting in the same room for a few years. Well, all of the chips and technology in those boxes has been gradually upgraded. I got a new box days after I had everything setup and it made a dramatic difference. Make up any lie you want as to why you need a new box but don't tell them you want it because you just got a new HD TV. They probably won't respond very well to that.
So I now have a system that displays HD cable in 1080i and a DVD player that up-converts to 1080i getting me very close to an actual HD DVD or BluRay picture at a fraction of the cost. I can continue buying the regular DVDs at $10-15 each vs. the HD content at $23-30 each. In total I spent about $2400 on a near-HD DVD quality system which is thousands less than I would have spent on a 1080p TV, HD DVD or BluRay player, Separate Stereo and Speakers, and cables to hook it all up. On top of that, the thousands of dollars I have already spent on regular DVDs doesn't go to waste and I can continue to purchase those DVDs at 1/2 the price.
All in all not a bad alternative to the high priced, drm crippled, user unfriendly HD DVD or BluRay solutions of today.