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I too have been worried about things like DVD upgrades and ripped DVD quality on the new HD set, but the new Handbrake seems to run a lot faster (at least for me) with ripping to h.264 so that significantly cuts quality video sizes. For DVD I'll probably need to get an upconvert DVD player - I heard they work really well.
Also for your HDMI vs Component debate- if available always go with HDMI. Everything is there in one cable, full 1080p hi-def video and audio. Component I believe can go to 1080 (not sure if p or i) but I've yet to see anyone using it for that.
Good tip about the DVD ripping in the new version of handbrake. I should try that out and see what stuff looks like in H.264.
The biggest consideration for size is your viewing distances when seated. I should have gone for max 48" because of the size of that room.
I rip DVDs with DVD Decrypter + DVD Shrink (old school) and they all look fine (I usually got for ripping out all of the extras + non-english audio tracks to have minimum impact on video quality).
Watching XViD is a little wonky when it comes to action sequences.
Normal analog cable signals are unwatchable because of noise and distortion.
The room we're thinking of using is obviously set up for the tiny 19" television, so the seats are pretty close. If we stick a bigger TV in the living room it may work better, but that would entail rearranging the surround sound setup (ugh).
Maybe this first HD tv we get will be the "second tv" and someday when the HD DVD format thing is worked out (and all the equiptment that entails) gets cheaper, I'll take the plunge.