1) What is the best 40-42 inch LCD for mainly watching SD and HD programming with no 1080P DVD player? (Remember, the other room is for the serious movie watching).
On the high end I can recomend Runco. We just saw the one we will be giving away (winner coming soon - like Monday). On the low end, I saw a 1080i Vizio for $1100 at Costco. For the money, it was pretty bitchen.
2) My viewing distance is 10 feet so do I even bother with a 1080P TV because some have said that after 6 feet your eyes can't tell the difference between 720P and 1080P on a screen this size? Or do I get the best I can and not worry about it?
I think 1080p is important especially for someone with discerning tastes like you. The more pixels the better. With that said - you have to make sure you don't go broke on a 2nd HDTV room otherwise people will start calling you Dr. Ken Taraszka (see his many posts on the forum and reference system).
3) Do any sets upscale regular 480i programming to higher rez or is it garbage in, garbage out?
My recording professors talked about the idea of "no matter how hard you rub you can't polish a terd." For the most part I belive them however look into DVDO's video processors. They are VERY trick and can scale video nicely. I have seen two demos at CEDIA and CES where they can make even progressive native signals look noticibly better. Its not a cheap unit but worth it if you want to get the absolute most out of your HDTV 1080p system.
Jerry Del Colliano