How far apart in quality is 1080i vs. 1080p?

As far as screen distance is concerned, it would depend on your eyesight, as well as the ratio of your viewing distance to your screen's width (i.e., your viewing distance from the screen divided by your TV or projector's screen width using the same unit of measure). The further away you are from the screen the less relevant high definition may become, though in reality, I have found that even when you are too far away to take advantage of the details in HD, you still get more vibrant colors.

There are recommended minimum and maximum distances for usefulness of the above mentioned ratio, but if you have excellent eyesight acuity, you may see details further than the recommendations state that you will (I know I do as far as my bedroom setup plasma TV is concerned).

My viewing ratio is ~1.59. I don't have any issues with pixelization using HD content, and once I get into a SD-DVD movie, I don't get bothered by the lack of detail. This doesn't mean the lack of detail isn't obvious when I look for it, but it usually doesn't bother me unless I look for it intentionally. I specifically chose to have my HT system set up for HD playback so that it would be close to THX and SMPTE standards, and so I could take full advantage of the higher resolutions with a very large screen size at a decent distance (I went with a 128.5" diagonal screen and I am around 14.85' away from the screen).

I'll try to post a link to a cool calculator excel spreadsheet I used recently for fun. If I can't post it, e-mail me and I'll send you the link via e-mail... I'll also post a link to a more simplified online version as well.

http://www.carltonbale.com/home-theater/home-theater-calculator/

http://myhometheater.homestead.com/viewingdistancecalculator.html

The PS3 is an excellent Blu-Ray player... I bought the Sony flagship Blu-Ray player when it was initially released and compared it to the PS3, the only advantage to owning the flagship player was the analog output of high definition sound. The picture quality was the same (they both use the same video processing chip and output a digital signal to the TV, or in my case a projector, via HDMI). I decided to return the flagship player and just use the PS3 instead...

There is no comparison between upsampling and Blu-Ray disc resolutions. You are talking around 345,600 pixels vs. 2,073,600 pixels. If you have a high definition TV, that is 6 times more "real" pixels from the original analog/digital signal! That means Blu-Ray has 6 times greater resolution than normal SD-DVD (Standard Definition)... Upsampling can't add material that is missing, it can only blend in approximations using digital algorithms to come up with those 2,073,600 pixels. So, though you may have the same number of pixels in use with both signals, visually there is no comparison on a good screen. This is because the fill-in on the upsampling is only an approximation not the actual original signal at 1920 x 1080 resolution. The upsampling sometimes ends up looking foggy and smeared with blending artifacts, even when using the best algorithms on the market, because you are losing detail that can't be given back once it is gone and the only solution is to stretch out the information that is already there to fill the empty pixel space. Compare the image quality between an upsampling player and a HD-format side by side and you will find that the difference is night and day (I've made such comparisons on my HT system).

If you do decide to get an upsampling player, get the Oppo DV-981HD or DV-980HD. I use the 980 and 970 (discontinued) myself in the living room and in my bedroom (I use a Denon DVD-5910 in my HT, but this is because of its audio features...). These players aren't just a preference on my part, they are some of the best measuring upsampling players available, if not the best.