does anyone here think that 5" is worth another thousand dollars?
only if you can easily afford it.
For my money I bought a projector, I got a 100'' hd tv (hd projector onto a 100'' screen) for $900 two years ago. Ok, its only 720i, but it was the best sub-$1000 model at the time. I doubt I'll ever go back to a "normal" tv because projectors are just so much better for the price.
I'm totally with you on this. I have a 110" projection setup (also 720i, also purchased about 2 years ago. There are only a few 1080 projectors out now, all of which are relatively expensive) and couldn't be happier. I think most people would be absolutely amazed at the quality you can get these days for the price.
(Revenge of the Sith just came on in Hi-Def on HBO yesterday, was absolutely awesome! The picture quality that is, not necessarily the movie

)
As for the 37"/42" decision, if it were me, I'd probably save my pennies and go with the larger screen, if my budget allowed it. I would imagine you plan on keeping this TV for some time, it may be worthwhile to future proof if you can.
My in-laws have a 42" plasma, and I dont think I would personally enjoy watching anything smaller, especially if I want to watch regular TV shows in 4:3 without stretching horizontally.
Your seating distance will make a difference here as well. If you sit pretty close to the TV you may be fine with the smaller set - but this is totally personal preference.
Also, prices on plasmas do seem to be dropping, and might be worth checking out. JMHO.
Either way, your sure to enjoy it, especially Hi-Def! Good luck with your decision!
Koz