720p always. Look, unless you bought some piece of shit Vizio or something, your $2000 1080p TV will always do a better job of upscaling then $400 PS3, $200 360, or $50 upscaling DVD players. Always.
Also, the sound did seem a little off to me. I mean, it sounded fine but the low end punch was missing. I have a fucking massive subwoofer too, and I remember certain areas in Resistance 2 that were literally shaking my walls apart. I could barely tell my subwoofer was on during the KZ2 demo. It's almost like they left the LFE channel off the demo to reduce download size or something.