Yes, LCDs will automatically upconvert interlaced signals to progressive scan signals. This is known as "de-interlacing." The problem with it is that there are different forms of de-interlacing signals, and they each have cons. I'm not sure if there's a new de-interlacing form that looks just as good as progressive scan, but as far as I remember, a native progressive scan signal will always look better than a de-interlaced signal.
Apparently the last fall update added 1080p support for PC monitors (through the VGA cable) so why bother with 1080i & de-interlacing?
EDIT: Oh, I get what you're saying - if the game's in 1080i, then I'm not sure what handles the deinterlacing... if the 360 does, then the signal will look better than if the monitor does probably.
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