I've hooked up my eMac to the TV, which is basically the same thing as it uses the same adapter. The output is good, at least if all you're going to do is watch movies. Don't even think about using it on the TV for anything else like web-browsing, as the resolution needs to be set really low before you can start seeing details on the TV.
It does indeed show on both screens, so, uh, you can sit in front of the computer and watch if the TV is crowded...
VLC works really great in the full-screen mode, and if you plan to play movies with separate subtitles file VLC handles many of those too. (File -> Open File... and you can set the subtitle file, remember to activate it in the VLC menu later.)
I don't know how it is with the new iMacs, but on the eMac, video mirroring is limited to 24-bit, so you might notice some colour difference. Play around with the colour settings on your TV until you're satisfied.