Michael, as the other replies have indicated, different types of so-called "converting" should be kept separate. Transcoding in a receiver allows composite and/or S-video inputs to be put into a form where they can all be output from the receiver's component output cables, instead of having to use different types of output cables. This doesn't make the composite or S-video input equal in quality to a component video input, it just makes it convenient to use just the component cables.
The scaling and deinterlacing of 480i material(DVDs, SDTV)to fit your 720p TV has to be done by the set itself if it hasn't been done earlier by a player, receiver or a separate unit. What's best depends on which of these does the best deinterlacing from i to p, or scaling from 480 to 720. You're right, there'd be no purpose in setting your player to 1080, since the TV would have to scale it back down to 720. You should experiment to see if setting the player at 480i or 480p instead of 720p would give you a better picture. This would have the TV rather than the player doing the deinterlacing and/or scaling.
