I think coupled with a great HDTV, Blu-Ray produces better picture. I've stood and observed a lot of different HDTV's and HD-DVD/Blu-Ray setups in stores (never in a home setting, which doesn't make any difference) and liked Blu-Ray better. Same with my video games, I can't stand playing them in anything lower than a 1280x1024 reso, and while staring at the TV playing GH3, my eyes begin to hurt after 2-3 songs.
I can't remember the brand name, but I was watching Ratatouille(sp?) on a Blu-Ray player, with 1377x768 (something like that) resolution, 720p setting on the player, and it was the most fantastic picture I've ever seen on a TV. I think the brand was philips, because I recall the larger philips HDTV's in there having super-sharp and super-high quality picture, and by far looked to be the best in there.