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The problem rears its ugly head when the PS3 is connected to a TV that only accepts a 1080i signal and not 720p. You see, when you play a game made for 720p, the PS3, rather than upscaling to 1080i, will downscale the image to 480p. This leaves you with a not so great image.
“This is an issue on the side of the individual television sets,” confirmed SCEA in a statement, “which do not accept 720p input, so when a game outputs an HD signal only at 720p, these select TVs have to display the game at 480p instead.“
Whoever is at fault here should soon be irrelevant though, as Sony says it will be fixing the problem in an upcoming firmware update. When exactly this will be released hasn’t been announced.