Tough question, but it seems to me that it depends on how good the scaling and image processing is all round (from source to picture)...I've found that 720p stuff looks better on a WXGA (1366x768) LCD TV than my 1920x1200 LCD monitor; both are scaled, but by different amounts. Obviously one is a monitor and one a TV so they have different amounts of picture processing and this isn't a fair comparison.
I've sprung on WXGA because I've found a 1080i signal looks better when sampled down than when displayed 1:1 in all its interlaced shame, and 1080p sources on a 720p screen still look great. 1080p looks noticeably better than 720p on a 1080p capable screen, thats obvious, but availability of material that high-res is a killer.
I may be off the mark here (since its all first hand opinion), but in essence I agree with you...I think. Image processing can make up for a lot, ffdshow scales DVDs up to my 1920x1200 screen far better than I'd expected, DVDs with high production values such as LoTR can be mistaken for HD, but you will always be fighting a panel with a native resolution to some extent.
That said, I'm no expert...</disclaimer>