I'm not sure about 1080p, but the service will allow 720p and the lag will depend on your connection. Also, it's worth noting that lag on the micro console is supposedly less than the lag you'd experience while using the service on your PC. At least that's my understanding based on the reviews I've read.
The micro console upconverts the 720p to 1080p, the picture quality is a lot better than playing over PC. Defiantly worth picking up, and if you don't like it you can sell it on ebay for 50 bucks and get a two free games out of the deal.