Emerging display devices utilizing LCD, LCOS, DLP, and plasma technologies now support a native 1920x1080 resolution. The HD broadcast standard supports 1080p. It doesn't make any sense to build the disc-based HD market--which will likely be the home video standard for decades--on 1080i. You can already get a 20" LCD TV for less than $700; in five years, it will be half that amount, putting LCDs in the same price plateau as current analog displays. They take up less space, they use much less power, and they look cooler. CRT's days are numbered.
Within 10 years, the analog display market will be dead, and interlaced video has no place in a digital world.
It's been suggested they could implement the same deinterlacing technology used for current DVDs (which are 480i) to convert 1080i to 1080p on the fly. Bad idea if you ask me since we'll inherit all the problems DVD has today (bad film edits, poorly encoded progressive flags, etc.). Much better to encode 1080p natively and let the device scale down to lower resolutions for older displays. Studios also perform vertical filtering on 1080i material to reduce artifacts on 1080i displays, drastically reducing detail. If they perform the same processing on 1080i destined for Blu-Ray, upconversion to 1080p inside the player wouldn't provide image quality equal to that of native 1080p.
While I think Sony has the superior technology and they might win the battle based on brute force marketing and sheer numbers (Toshiba and NEC building and selling a couple HD-DVD decks vs. just about every other manufacturer on Earth selling at least one, maybe two or three, Blu-Ray decks), the HD-DVD standard is more forward-thinking and a better deal for consumers. Better codecs, better audio (vs. Blu-Ray's DD/DTS crap), and native 1080p. The lack of storage space is unfortunate, but multi-disc DVD sets don't bother me now, so they won't bother me on the next format either.
If the Blu-Ray Group gets smart and adopts MPEG-4, multi-channel MLP audio, and native 1080p support, then the choice is clear. Until that happens, I'm pushing for HD-DVD.