Did I make a compatibility mistake?

[jermwhl]

I think your referring to those black bars on the top and bottom of your screen. Perfectly normal. The size of the picture has been retained to give you the experience the director intended you to see it in.
If you watch movies with the lights off, you won't notice the black bars anyways. A 1080i/P tv won't get rid of the black bars, and I'm sure your TV (although 720p native) will still display 1080i pictures. Yes HD is amazing and welcome to the wonderful world of blu!