Hold on you horses.
Dropping from 1920*1080 to 1280*720 is a quality loss, sure it still looks probably quite fine. But if you have 1920*1080 (1080p) capabale display, i am quite sure you'll see the difference. Off course the source quality is also important.
You might want to consider to keep the full 1080p resolution., simply lower the bitrate.
There aren't many guides yet to achieve a blu-ray/hd-dvd to mkv convertion but i found one here