Hey Guys
I'm no expert at all when it comes to HDTV or video, so please forgive me if my question may not make alot of sense to you videophiles.

I recently got a Dynex 26 inch LCD TV (Model DX-L26-10A) It has 2 HDMI inputs in it.

Okay from what I saw on the box, my HDTV is 720P. However, I'm a little confused now since I upgraded to Directv TV HD and when I turn on my TV, a little Icon is in the corner and and says "1080i" I know my receiver is receiving up to 1080i and the TV seems to indicate it's 1080i as well. So, I'm confused, Am I getting a 1080i signal on my TV or is it downconverting it to 720p? I'm not even sure I understand the difference between 1080i and 1080p. There is a format button on my remote where I can apparently downgrade the signal. And when I tried doing that to make it 720p, the icon on my TV then says "720p"

Can anyone shed some light on this mystery for me?

The Direct TV HD receiver is outputting a 1080i signal and sending it to your TV...that is why you see the "1080i" indicator, as that is what the box is outputting....your set is capable of handling an input signal of 1080i....
The actual resolution of the TV (and what you are seeing) is 720p, as your TV is automatically taking that 1080i signal received from the set-top box and downconverting it to its native display of 720p....
By pressing that format button on the Direct TV remote you mentioned, you are then switching the set-top box to output a 720p signal, in which case it is the Direct TV unit that is now handling the downconversion of 1080i channels instead of the TV...you might want to switch between the two choices for the box and see if you can tell any perceptible difference between the settings...I doubt on a set of that size you will notice anything, but if so, just keep the setting that handles the conversion better....

PS: The difference between 1080i and 1080p is that the "i" stands for an interlaced signal and the "p" stands for a progressive signal....be aware though, that no stations broadcast in 1080p....

Thanks WMAangel!
Very thorough and concise explantion.