Yes the GWIII's scale to 788p, yes you can play with this in the service menu to mostly eliminate the scaling (and get at least what I call quasi-1x1 pixel mapping), and, at least for normal 720p sources, no you don't want to do this unless you like underscan.
Personally I have mine set up (via service menu tweaking) so that I get quasi-1x1 for 720p on my DVI port only (which my PC is hooked in through); I let it scale 720p over the component inputs for the Xbox, etc. My PC is set to be pushing the limits of what the TV accepts as 720p timings to actually put out a slightly higher resolution, 1336x742 IIRC. This is discussed in other threads such as
this one if you're really curious

. To be honest though it does a really good job at scaling and 720p doesn't take a real noticable visual quality hit as a result for just about anything but Windows desktop use.