I think what you heard was a difference between 480p and 720p/1080i.
There can be a difference between these two as there is a large difference in how much the console is actually displaying.
As for the 720p/1080i difference, as was said before, it comes down to the screen. If you have a CRT, 99% of the time you want to set the xbox to 1080i as almost all CRTs upconvert to that.
Most LCDs display at native 720p. So, if you don't know what it's native resolution is, and you have an LCD, you're most likely best setting it to 720p.