Flat-panel displays always display a progressive image, regardless of the source. For movies, especially if your native resolution is greater than 1280x720, it is usually advisable to use the highest-resolution signal possible. Movies are typically filmed in 24fps and do not see additional benefit from a progressive signal. Games are a different story of course, but the intent of this thread leans more toward movies.

It also depends from your TV:s ability to use interlaced signal. That differs a lot between TV:s. Basically upscaling and interlacing is the worst possible situation. I would say using 720p would be optimal to your 720p TV.
But, maybe others know better than i do.

Seeing as it's a 720p native set to set the resolution to 1080i would be oversampling

Oversampling is when an image is rendered in higher detail and then shrunken to the smaller screen. The end result is that for each pixel on screen, there is more than one pixel of information to draw from, so the system is able to average the information out and create a much more accurate image. This is very similar to the effect known as anti-aliasing, which does basically the same thing but only for polygon edges. Anti-aliasing is a much more efficient approach since oversampling polygon faces is generally not very beneficial.

In the end, as long as your TV can process the information well(which looking at the TV etc it probably/most likely can) the end result should be just fine. For movies they won't take advantage of the 720p's higher frame rate much if at all so a more detailed image to work with may prove advantageous to your overall viewing experience. I tried to explain it as easily as possible, I can provide images based on a game if you like to try and visually explain it.

If you are watching or playing somthing with a lot of quick movment stick to 720p. If You are playing or watching something with little action 1080i is better. If you try and play Stranglehold at 1080i your eyes will go crazy do to the bluring. If you play Tiger Woods in 1080i it should not have any problems. The issue with Stranglehold is the same issue I have with a lot of scary movies and action movie on HD-DVD. Thier is so much blur going on due to the interlacing that I get a headache. At first I thought it was just the old TV I was useing, but I hooked it up to my new Pioneer PDP-5080HD and it still did not make a differance.

KBG29 said: If you are watching or playing somthing with a lot of quick movment stick to 720p. If You are playing or watching something with little action 1080i is better. If you try and play Stranglehold at 1080i your eyes will go crazy do to the bluring. If you play Tiger Woods in 1080i it should not have any problems. The issue with Stranglehold is the same issue I have with a lot of scary movies and action movie on HD-DVD. Thier is so much blur going on due to the interlacing that I get a headache. At first I thought it was just the old TV I was useing, but I hooked it up to my new Pioneer PDP-5080HD and it still did not make a differance.

You say this fully realising that HD-DVD is using relativly the same picture as blu ray, yes? The compression techniques may be different from company to company(sony and toshiba can't force them to use a specific one) but unless your superman or a company is retarded(most try to use good sense) the picture should be virtually the same from blu ray to hd-dvd. progressive scan is far more important on digital things than live recordings. Digital sources can actually use 60 frames, a live recorded source only uses 24 the TV/DVDplayer etc only multiplies the frames it doesn't make mid way frames rather has 3 frames the same, in theory it could make trails more pronounced as the images stay up for longer(though your eyes can't perceive it). THE absolute biggest variable in the trails is the TV's refresh rate(hz or ms time) though frame rate will help a bit unless again you're superman you shouldn't be able to tell much difference between 1080p and 1080i on non-digital sources. If you're having problems I'd more point to your tv. It's possible you have a bad display, my friend plays stranglehold on a 1080i set and has no problems at all..

@KBG29:

You're seeing ghosting on a plasma? That seems unusual; they typically have VERY fast response times. I view a lot of 1080i signals on my television and I never see any blurring or ghosting. It sounds like something to do with your display, not your source.

Dude put in your favourite game and movie and test them out!! The one you think looks best will be the better option!! Usually the difference is negligible but I find I use 720p as my 360 looks better on it although my movies seem to appear more crisp using 1080i. And cause I'm a gamer first and the difference is so small is my main reason for preferring 720p!

There are a million opinions here but this is a good rule of thumb:

gaming=720p or any other "p" resolution
movies & tv= 1080i is the same as 1080p

It has to do with framerate... "i" resolution interlace the image so they cannot display more than 30fps... In games, framerate can go higher so a "p" resolution, or a progressive resolution, can take advantage of this and show framerates faster than 30fps.

Anyway, there's also the problem whether your TV properly deinterlaces 1080i but from what I can find, it appears that it does. You might want to check more into it. If the Sony doesn't deinterlace properly, always use 720p.

Thanks for all the info yall, I miss the days when you just plugged a cable into a TV and it all worked. :-p