The descision to purchase a 720p or 1080p set is partially based upon the distance from your seating to the screen. For a 42" screen you need to sit 6 feet or closer to see the improved resolution provided by a 1080p set. This may be a moot point since there may not be much difference in price for a 1080p LCD over a 720p LCD. Other factors such as color saturation, viewing angle, black levels, contrast and general video performance are probably more important factors to consider when shopping for a new TV unless you are getting a really big TV/screen where you will sit very close.

As far as which DVD player to use you probably can't go wrong with the Oppo (either the 981 or 970). As kscharf points out the combination of player and TV will determine which component (TV or DVD player) does the video processing as one will do it better than the other. You will have to experiment to find out which one you prefer. My experience is with the 970 and it is a fine, and inexpensive, player. However, as Gonk pointed out, the cost for the more powerful 981 is only $80 more than the 970.