I have a 40 inch in 720 and it looks so much better than my friends 40 in 1080p.

Progressive scan > interlaced. I have to deal with interlaced footage alot at my work and its just a pain in general.

720p

Progrssive is way better than interlaced.

You see the entire image on the screen the whole time.

I have mine in 1080i, but I'll try it in 720p to see the difference.

My personal opinion I think that 1080p looks good on a 60 inch...not anything lower.

It all depends on the source graphics.
If it was made in 780 or worse, in 480, it will look crap when blown up to 1080 (either i or p) without some kind of decent post processing (an upscaler)
for example, take a native 640x480 pic and blow it up to 1900x1080 and see the blocky pixels.

Shrinking a native image from 1900x1080 down to 640x480 will make the pic smaller but will still look ok

Games and video i'm pretty sure work the same way: take an SD game and blow it up to 1080 and it will look shitty without an upscaler unless you're using a smaller HD screen

But also, taking an HD game (like GT5p for example) and putting it on a SD screen is also not a good idea, as the game was designed in HD in the first place, the image will look crap at best and unusable at worst for playing games. An HD still image picture being downscaled to SD won't make much of a difference, but you might lose the sides of the image or something like that

Bottom line i guess is if you have an HD screen and are picky about graphics, only get games designed for HD otherwise you'll be disapointed when the graphics come out as a blurry mess...

so for me, 1080p for the win if i can get it.

What about 1080p bluray movies being played on a 720p res? Will it affect the quality when it's downscaled?

It shouldn't, but then it depends on the size and quality of your screen

anything much larger than about 46" and you might notice some strange effects

once you get over that size, the image has become shrunk (to 720), then stretched (to over 46")to fit the screen, making it potentially blurry or blocky depending on your upscaler/processor in your screen. having the "p" as opposed to "i" will make transitions from frame to frame a lot smoother though (better motion onscreen)

i thought tvs ran at 1080i and 720p at the same time?

For games 720p is just about always going to be better.