I use the default media player (Xine) player all the time with 1080i content. It's fine, except the open source de-interlacers aren't as good as the windows counterparts. I haven't tried 1080p.
You can change in the database which media player to use for which type of content. There's also a wrapper for VLC, and I'd like to add one for Gstreamer and others. Adding a LinuxMCE wrapper for existing software is pretty easy; it's just a matter of linking the DCE library to get socket control. But at the moment, only the xine wrapper is tested.