Actually, as an owner of an AppleTV, I have to say that 720p material looks great! I did rip a few DVDs, and they look OK, but HD native material looks great. iTunes has a few 720p video podcasts and they look stunning on my 50" LCD rear projection TV.
I don't think that you see 1080p material anytime soon. 1080p sets are just starting to come down in price and the bandwidth required for video of that quality will be sometime in coming. As well, while storage might be cheap at present, it isn't that cheap for what would be required for 1080p.
Once Apple has the content issues solved, I think that this thing will take off, like the iPod. Remember, the iPod took a while to get going, with it only really taking off once the second generation players appeared...
The Contradictions of Apple TV