I can only speak for myself and my experiences with my PS3, but i'll give you my take and responses to the questions and impressions of others. First, the 40 GB version has a HUGE downside in that it will not play any legacy (PS2/PSone) games at all. I'm confused on why that is. The 60 GB version played the games through a hardware solution, the 80 GB supposedly played the older games through a software solution, which confuses me as to why the 40 GB version can't also play through a software solution. if you can dig up anything on that I'd be interested. So in short, unless you can get your hands on a 60 or 80 GB, don't count on PS2 at all, which isn't the end of the world if you already have a PS2, you can just consider the money you are saving (500$ vs 400$) as saving the cost of a PS2.
Second, I have the Sony 50E2000 (720p), which besides the SSE on the screen, is beautiful and I can't imagine how your friend could feel that the picture was severely lacking. Most people that I have talked to, experts and otherwise feel that the PS3 is definitely the best solution and that no blu ray player is significantly better. The consensus seems to be that besides some of the very early models, the latest generation, and the one before it are all great and none significantly outperform any other, except in bitstreaming the soundtracks vs internally decoding.
I also have the Xbox HD DVD drive, which is very nice, I was surprised with what it can do, but I couldn't say one blows the other away, it all depends on the disc you are watching. Also the downside of the Xbox solution is NO uncompressed soundtracks, a big downside in my book.
I think you should feel just great about a PS3 all said. I'll let you know tomorrow after I listen to some DTS HD MA how much happier I am with my little black box!
