Indeed, the direct competitor to the PS3, the Xbox 360 allows you to select any video mode for any game.
And this is the reason why ALL multi-platform games are on the 360 in my house.
that sucks...it's weird that your tv would support 1080i, but not 720p. it is really stupid that the ps3 can't scale anything. i also buy all multi platform games for my 360...not because of resolution issues, but just because i just like it better. i think the controller is better (dpad sucks though) and xbox live just blows away what sony has to offer.
sounds like you have a prime reason to buy a new TV though

i dont know what size TV you have now...but we just picked up a 42" vizio a few weeks ago for $750 and it is awesome. it is pretty much my wife's TV, but i am very impressed with the picture quality. to be fair i havent played any games on it, since all of my consoles are connected to my mitsubishi projector instead, but the HD programming through directv looks amazing.