Yes, I would recommend an upscaling player. Upscaling is pretty common now, you won’t pay much of a premium over a regular player. You will see some benefit from upscaling, and you’ll also see a benefit from using HDMI versus component video. Remember flat panels are digital displays and an HDMI connection will give you a digital signal all the way from the source to the display, the component connections were analog of course.
BTW, you can get good quality HDMI cables pretty cheaply, you don’t need to spend a lot of money just because it’s HDMI. Here in the U.S. Monoprice.com has reasonably priced cables of all kinds.
No - most DVD players already offer progressive high-scan, as well as playback in different formats. If you want the high-resolution without paying for a Blu-Ray, then there's a DVD player that plays DVDs at 1080pi resolution. Crutchfield.com has some.
http://www.samsung.com/us/consumer/detail/detail.do?group=televisions&type=televisions&subtype=lcdtv&model_cd=LN32A550P3FXZA
We spent $799, saving a little over $150 from the list price.
Several weeks before that, we had bought an Insignia Blue Ray for $199 (thanks to the info from Las Vegas Dave) from Best Buy. When we watch a blueray dvd on our Samsung, it's like being in the movie theatre while laying in bed. Now if I could only make it through one of the movies without falling asleep.....