This is one of the better articles I have read that discusses directly what on screen resolution vs. image size, vs. viewing distance should be for most people.
http://www.soundandvisionmag.com/hitech/1137/maxing-out-resolution.html
What is not discussed?
1. Displays themselves often have different qualities. One 1080p display does not always look as good as another 1080p display at the same size.
2. This is often due to image processing and poor color calibration. With digital displays it is critical to understand that if your display is 1280x720 in resolution - then THAT IS ALL IT SHOWS WHEN THE SCREEN IS FILLED! So, even though it may accept 1080p, 1080i, 480p, and 480i signals - the only signal that is truly 'native' to the display would be a 720p signal. Because of this, the scalers inside the display will play a huge role in how good the on screen image appears.
3. Color handling/calibration is also critical. You simply can't get a great image if your colors are all wrong. Avia or Digital Video Essentials which are both calibration DVDs are the least that you should do to work towards a decent quality image - regardless of which TV you own.
4. LCD/DLP/LCoS/CRT - They are all slightly different. Since you mentioned a 25" depth, it sounds like you may have a CRT rear projection unit. CRT, while it typically has phenomenal color and black levels is also known for having a very 'soft' image to many people. This is because the image MUST be converged. That is, you have a red, blue, and green image that are layed on top of each other to get the full color image you see. To achieve this, all three colors must be perfectly lined up. If they are not, then the image will look soft, and often a bit blurry. This is something you can do yourself in just an hour or so and will greatly improve your overall image quality - but most people don't know that they should do it! Digital displays including DLP/LCD/LCoS do not require this and typically look sharper than CRT even though they often lack the contrast levels that CRT can reproduce.
5. Finally - the SOURCE matters a great deal! A HD source is obviously best, but the player of that HD source must also be fairly good at processing the HD signal. If you have a DVD player then that should be a good product. Many people go out and buy the cheap Samsung upconverting DVD player. After all - it's cheap and has HDMI - so it MUST be good.... right? Clearly, you see the flaw in that logic. Better processing costs more money and if you want quality but don't have a lot of cash, then you need to get as much information as possible - then fine a deal.
www.videogon.com is a place where some great stuff can be had for some good deals. eBay is not everyones favorite place - but it also offers some great deals at times.
Yes - image size/resolution/distance/quality matter a great deal and are all tied together. Make the image bigger, move back. Increase the image quality, move closer. Improve processing, move closer. Have less than 20/20 vision? Move closer! Switch from HDTV to a VCR tape? Leave the room.