What do you mean by "small drop in quality?" It's not stretching the image obviously, but what happens during the upscaling that makes it look worse that native 720p/1080p?
Aren't native 720p signals upconverted/scales in 1080p TV's?
There is some noticeable aliasing on edges when sitting close to the display. You are right that 1080p TVs scale 720p up to 1080p, but they are highly optimized for this kind of scaling and do additional image processing to make it look good (which adds a lot of latency).
The Atlona is doing all the image processing and scaling, and it's very low latency (even while doing the HDMI to MDP conversion at the same time), so the quality is not quite as good as a powerful image processor and scaler. An example is that scaling using software on my Mac is definitely a lot better at scaling 1080p to 1440p, but it has a lot more processing power to do the image processing and can do it very quickly.
I would say the quality is good enough for me, it has no image issues like ghosting, weird color outlining, or anything like that. I have used quite a few hardware based scalers like the Atlona for other displays (not MDP displays mind you) and they were all much worse than the Atlona. If you aren't sitting so close to the display there is no issues.
Basically is it the best looking scaling I have ever seen before? No of course it doesn't compare to more powerful scaling that can be done with a computer, but it also does something that no other scaler does which is support HDMI to MDP and even audio over MDP. The results are more than acceptable.
I did a comparison where I played back a 1080p movie on my Mac Pro and played it back on my PS3 using the Atlona. The Mac Pro clearly looked better doing the scaling, but when I actually sat a few feet back from the display I couldn't tell the difference between the two at all.