"They say it only improves the picture on HD-TVs"
That's because the TV has to be progressive scan capable. Doesn't have to be an HDTV, but most are.
"They say it only improves the picture on HD-TVs, but my monitor should be better in image quality and res than any tv right?"
For reading fine text, yes, for watching movies, no. The default color saturation and temperature settings are completely different on a monitor vs a TV. Highend progressive scan DVD players connected to progressive scan TV's will produce a much more pleasing picture than WinDVD or PowerDVD can on a monitor. Who wants to watch a movie on an 17"-20" viewable monitor anyway?
"Even with a 27" Wega DVD's still look better on my PC."
Most of the non-XBR Wega line is not progressive scan capable, only the newer models are. Regular Wega's aren't that great anyway. Other manufaturers are making better TV's that cost less.
"SO, in short, my current dvd player is just as good as progressive scan? Maybe i should just by a 19in monitor then."
No, it isn't, but the large cost of a progressive scan capable setup will turn off most people. DVD player prices are dropping, but the TV prices will still hit you where it hurts (in your wallet).
"What is interlacing??"
It's the process of drawing a frame in 2 passes (also called fields). First the odd horizontal lines, then the even, or maybe it's the other way around, either way you get the point.