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I personally use the ATI dongle to output DVDs at 1080i (using DVDidle software) and have very good results (my set is not ISF calibrated, so I'm confident that is the limiting factor). Basically a good DVD like the Fifth Element looks EXACTLY as good to my eye as a 1080i HDTV stream of the same scene from the Fifth Element. Again, with a little work my set would probably squeeze a little more detail from the HD stream, but I flipped back and forth several times and could not find a difference (the HD scene had slightly richer color, but that's adjustable anyway).
Another advantage is that you can add in filters like FFDshow that give you control over sharpness enhancement, video scaling, noise reduction, deinterlacing method, etc. etc. etc. that you would NEVER have with any standalone DVD player. This means you have the freedom to screw up the picture as much as you want to! In moderation, however, you can really tweak the picture to your liking and have excellent results.
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