Will Blu-ray work on my setup?

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I built a new computer for a Media Center some months ago. I decided I would give a go at turning it into Blu-Ray now... I'm curious if this will work with my hardware so I'll list it below. The biggest concern I have is having hardware that can down-convert from 1080p to 720p for right now. It seems that the two graphics cards I have tried lock up and have video lag glitches during the playing of standard format video when the vid cards are in 1080p mode. So, I downgraded it to 720p mode until I can afford a better video card.

Here's what I got going on:
AMD Athlon 64 X2 4400+ Brisbane 2.3GHz Socket AM2 65W Dual-Core
MSI K9N Neo-F V.3 AM2 NVIDIA nForce 560 MCP ATX AMD Motherboard
MSI NX8500GT-TD256E GeForce 8500GT 256MB 128-bit GDDR2 PCI Express
Western Digital Caviar SE WD2500AAJS 250GB 7200 RPM SATA 3.0Gb/s
A-DATA 1GB 240-Pin DDR2 SDRAM DDR2 800 (PC2 6400) Desktop Memory
Rosewill RP500-2 ATX12V v2.01 500W Power Supply
Windows Vista x64 Service Pack 1

I will be adding:
LITE-ON Black SATA Blu-ray DVD-ROM Drive
Western Digital WDG1U5000N 500GB 7200 RPM External Hard Drive

Would this be able to handle displaying HD content of a Blu-Ray movie on my Toshiba 1080p LCD? I don't want to spend the money on a blu-ray drive and then eventually a 1080p capable vid card.

Also, if anyone wants to advise on a fully capable, and not too expensive, video card capable of 1080p without glitching or locking up feel free to let me know!

Thanks so much everyone!