To be precise the hardware is outputting 720p, but XBMC can decode 1080p files and scale them down. I'm not sure if the output can be hacked or not, but the developers claim it's "not a priority" at the moment.
In my opinion, some ION2 nettop with minimal Ubuntu and XBMC would be better option than WDTV. More expensive, yes, but not that much[1] and definitely provides better experience.
[1] Note that I'm in EU-land, where AppleTV is 120 EUR, which is 160 USD. Acer/Asus/Zotac/other nettop vendors do not have the same problem with currency conversion that Apple does.
I've got XBMC on an Acer Revo nettop, and having a little always-on Ubuntu server has various other uses for me.
Apt-getting installs/updates to XBMC rather than jumping through whatever hoops you need to for this is a blessing too.
One downside, you'd need to buy a 3rd party remote and USB-IR receiver and get it working with Ubuntu/XBMC. (At least I did, I think the newer version has one built in).
I'd like to get rid of IR remote with non-standard receiver and replace it with Bluetooth one (Sony PS3 Blu-Ray remote). Anyone has experience, how long the batteries last in this thing?
See XBMC Live, which is just as you describe (Ubuntu/XBMC) http://wiki.xbmc.org/?title=XBMC_Live without installing yourself. Apology if that's exactly what you meant.
I use boxee on a HTPC and love it. Boxee is heavily based on the XBMC code base but adds hulu, netflix and other VOD streaming and a nicer (IMHO) interface. There is also a standalone boxee player, I don't have it, and there have been some problems with getting all the supported content on it, but I believe that is getting worked out.
I used XBMC for years, but boxee is just a nicer experience for an Internet connected HTPC imo.
