1. Xbox360 can play movies in 1080p and play games only 1080i - PS3 can do both in 1080p http://www.youtube.com/watch?v=MakQpMSKP7I&feature=my_favorites&list=FLDgMavvhjqgKQCSSZLLCanA
Ah my bad, the PS3 has no hardware upscaler, only the Xbox360 does. Anyways as I said
most games will not be played at 1080p or 1080i, instead they will be upscaled from 720p (or lower) either by a dedicated hardware upscaler or a software upscaler to 1080i/1080p (Note I said games, not videos as video uses very few resources compared to interactive game environments.). I never said the consoles don't support 1080i or 1080p (I believe only the PS3 can run games at full HD?), I said that the majority of games are not rendered at those resolutions which is indeed true, very few games on the consoles will be natively rendered at such resolutions.
The crap hardware in the consoles is also why games originally developed for them, are often ported to PC with terrible textures because the consoles video cards have very limited video memory and companies are too lazy to remake/optimize the textures for PC.
With regards to the 120hz, 240hz, 480hz etc. (100hz, 200hz, 400hz, etc. for PAL regions) that TV's advertise, those are special interpolation modes where the TV interpolates/calculates and creates additional video frames based on source frames and insert them between source frames.
1, 1a, 2, 2a, 3, 3a, 4, 4a, 5, 5a, 6, 6a etc. is an example of a 120hz TV running with it's 120hz function enabled. every 2nd frame (Frames with an a) is generated/predicted/calculated by the TV and inserted between the source frames to create a smoother transition between source frames (A god send for the PAL N64). Essentially the TV predicts what the next video frame will be and creates what it thinks it will look like, it then inserts it between source frames, this process is very prone to errors which result in graphical artifacts.
Most TV's will let you choose what kind of situations the interpolation system will interact with, such as only working with slow panning camera scenes, moderate paced action or fast paced action. with the moderate and faced paced settings being more prone to introducing artifacts.
Interpolation for TV's was introduced to eliminate the visible judder/stutter you get with TV broadcasts (Is also beneficial to games that run at low FPS).