Sorry about your loss.
Blu-ray is many times better than DVD in both picture quality and audio.
If you are replacing the TV as well, which you are, you can get many deals right now to buy a new TV and get a Bluray player included as an incentive. You can get a good Bluray player for $99-$150 right now and it is well worth it. Especially if you have surround sound - the audio on Blurays is often uncompressed/lossless audio (not all of them) which means you get the full effect like a movie theater instead of watered down audio like on an DVD (which cannot hold as much data).
Get at least a 37" HDTV, larger if you can (screen size is actually a bit smaller than older CRT TVs because of the widescreen orientation so if you had a 37" old TV you actually want a bigger HDTV to get the same effect). Make sure it is 1080p and at least 120Hz refresh rate and it should have at least 3 HDMI ports. Samsung, LG, and a few others will give you the best quality right now in HDTVs.
But do youself a favor first and buy your HDMI cables from
www.monoprice.com and nowhere else. You can get perfectly good cables from Monoprice for $6 or you can let
Best Buy sell you a Monster HDMI cable that is no better in quality but will cost you $100. Seriously. Biggest ripoff in electronics right now, HDMI cables are.
If you go to
www.blu-ray.com they have forums where people post deals that are available and they have a movie price tracker - put in the title and it will give you the price on
Amazon and the entire price history so you can see if it ever goes on sale, etc.
The PS3 option is certainly one to consider, but like you say, you run the risk of fighting over movie time vs. game time, too.