You should be very happy. Your TV can handle 1080i. However, as I stated, unless MS comes out w/ an HDMI out for the 360, you can only get standard Dolby Digital/DTS sound. This is the same as a normal DVD gets through an optical or coax connection.
I would never use a game console as a movie playback device, but that's just me. I'll use the PS3 as a stopgap, since I'm not really into Blu-Ray, but I'll buy a standalone player if that format takes off.
Dolby True HD, and DTS HD are the new sound formats for HD-DVD/Blu-Ray. It basically is a way to deliver uncompressed PCM audio, which is supposedly identical to the studio master. I don't have the means to play this audio myself yet, but I will within the next year or so. The 360 device is not equipped to handle these yet, and will not be unless MS makes an HDMI out available.
Dolby True HD explanation:
https://www.dolby.com/consumer/technology/trueHD.html
I found a comparison between old DVD audio and Dolby True HD/ DTS HD:
https://www.dvdreview.com/html/road_to_hidef_2.html
My recommendation for you would be to get the new Toshiba A2 HD-DVD player. It comes out within the next 2 weeks, and is a FAR superior device to the 360 add-on. I've got one on order myself. Plus, Value Electronics.com has an offer for 2 free HD-DVD's, and Toshiba throws in an additional 3 HD-DVD's for free:
https://www.valueelectronics.com/Toshiba_HD-A2_HD_DVD.htm
https://www.valueelectronics.com/images/pdf/3_free_HD_DVD_movies.pdf
I've got mine on pre-order with Robert there, and I know many people from this forum ordered their A1's from him. I know Gruson did.