Originally Posted by ghostsup
Well, for some reason my TV supports 1080, so I was confused.
Thanks for the clarification though!
In that case, it's a 720p TV that is scaling 1080p signals internally to match the native output, so it can accept a 1080p signal but it doesn't truly offer actual
1080p output ... it has to downrez the video feed to 720p before displaying.
Generally, you'll be better off letting the AppleTV just feed it an appropriate 720p signal in the first place as the quality of a native 720p signal will be better than a downconverted 1080p signal. (Generally... there are exceptions to this, but in your situation I stand by the recommendation to be happy with 720p output from the ATV until you are able to upgrade to a 1080p TV.)
I agree it's odd that the ATV won't let you choose 1080p, if your TV supports it, but perhaps the ATV is smart enough to detect that it's actually native 720p and locks onto that instead of risking you degrade the PQ by choosing the option that would be less optimal.