I'd have agreed with you about visual fidelity until I decided to upgrade my 28" TV to something bigger a couple of years ago. When I compared the image quality of the flat screens (plasmas, LCDs), they weren't as good as my old TV (in various ways), but when I saw the Loewe Aconda 32" that I finally bought, it was clearly superior. The better quality picture doesn't make it significantly more 'real', in the sense that you're always aware it's a 2D TV image, but it does enhance viewing pleasure, it's more immersive - i.e. you're less aware of the TV screen and more involved in the programme or DVD. In fact, a high quality image does sometimes produce a slight illusion of depth - a kind of pseudo-3D... As far as the DVD player goes, if you are viewing a high quality screen, artefacts and errors from the DVD player are more obvious and will tend to impair the experience, so a player that has a minimum of artefacts and provides a high quality signal is desirable. How far you go with this is a matter of taste and wealth...
The same principle goes for HT- with all the ambient & surround cues from a well produced DVD, the experience is more immersive and compelling. As usual, it needs a decent quality HT system to take best advantage of the surround channels, and a decent DVD to supply them (the film 'Phone Booth' was my eye-opener in this respect).