First, I bought an LG 1080P 42" LCD at sears... they were on sale for $1099 and they gave me another $150 off the price so it was $950...  Smoking deal period as it is a GREAT set.  After waiting for it to show up for a month and getting repeated "updates" on the arrival of my TV, I finally grabbed a manger and made them give me something else.  The only TV that I was willing to accept (because of features) was a Sharp Aquos LC-42D64U.  It is a 1080P set also 42"  It's actually quite a nice TV -- better than the LG as it is a 4MS set with fine motion (no blur) and other cool tech wizardry.  Anyway, we haggled to 100$ more for the sharp and away I went as they had it in stock.  So I paid $1050 for a $1700 TV.  Nice.

Ok, so here is my question:  Does it really make any difference how the 360 is set up?  It has a 720P and a 1080P setting.  I'm assuming it scales everything to whatever resolution you have it set to?  Do games take any kind of performance hit whatsoever when scaling?  If so should I just switch back to 720P?   I'm new to the HD side of the 360 so I'm unsure...

So far everything is bigger, brighter, and just prettier overall.  The additional real estate on screen is great though I was already on a 32" Sony Wega which isn't a slouch by any means.

Now I'm kicking myself for not getting the $199 with 10 movies deal on the HD-DVD at Best Buy....  Sheet.  Hopefully my PS3 will be here soon so I have some kind of upscaler and can rent a few hi-def movies to see what all the buzz is about. 

NICE! I got a Samsung DLP over a year ago, same size as your LCD, and nothing compares to the picture quality of HD. You should also get directv to go along with it, especially considering all the channels they just added and football in HD every sunday is just unmatched. They have every single game in HD now, except for Bills and Browns home games I think, but I can't remember. Just wait till you watch a BD movie on your set, you will go gaga, its unbelievable. I just picked up spiderman for BD, and transformers for HD, and WOW. Just waiting for the new pirates and die hard to come out. I still remember when I got my 360 and played CoD2 on it for the first time, my jaw dropped. Of course, I never have played my 360 in SD, but that's why I got the TV in the first place. Although mine only does 720p and 1080i, that is more than enough for me right now. The living room might be getting a sony sxdr or a brand new samsung dlp 1080p soon though. How do you compare the LCD to DLP tvs? I just seem to like DLP more for some reason, what are your thoughts? Did you get the LCD because of size of the overall set?

I got the LCD because I wanted to avoid burn in primarily otherwise I would have gotten a Plasma as I think they look more CRT-Like. My son will be using his computer on it a LOT.

I love the picture on DLPs but as of yet, I haven't seen one that can hold a candle to the viewing angle of plasmas and LCDs. I have a small living room and view from odd angles so I need it to be viewable from any angle. For the money and size, it's hard to beat DLP, but 50" 720P plasma sets are getting CHEAP.

I debated getting the 46" sharp aquos 720P for the same price as the 1080P 42". In hindsight I probably should have gone that route instead (they offered to sell it to me for $999). I just don't see any real difference in 720P/1080i and 1080p. There is SO little content that needs 1080p that I've given up size for POSSIBLE future use of full 1080p in limited scenarios. ALL broadcast television peaks at 720p/1080i and that isn't going to change any time soon. My computer looks fine at 720P resolution (in fact at 1980x1200 I can't freaking read anything) and there are very few games that are TRULY 1080P native and, even if there were, I'm fine with 1080i/720p...

I do not know from experience, but if I'm not mistaken all 360 games are pretty much designed in 720p or less. So, I would set it to 720p for best results.

Set it on the X360 to 720p and see how it does. The X360 *should* detect the TV's native resolution and switch to it (it does this with my HD projector).

Typically it's best to play things at your TV's native resolution, which should be mentioned somewhere in it's documentation.

With an LCD, your best bet is to use the 1080p resolution. LCDs are notoriously bad at scaling and since the 360 offers the 1080p option, there's no reason not to use it.

I have the exact same TV, and connect my 360 via the VGA cable. I've got the 360 configured to 1080p.

Ok, well, I'll leave it on 1080p and speak up if it acts funny. It seems pretty damn good at this point....

Another note...

while it was true that about 6-8months ago most games were only 720p, nearly all the 'new' AAA titles on 360 are native 1080p.

Examples:

Bioshock
Halo 3
Assasin's Creed
Mass Effect
COD4