Deinterlacing is conversion of an interlaced signal to a progressively scanned signal, e.g. 1080i to 1080p. For the most part it won't matter, as the Sony will convert any 1080i content itself. There can sometimes be an advantage to doing it in one place over the other, but usually not much difference. For instance, if you had a long cable to your display and were at the limits of its bandwidth, keeping the signal interlaced would actually be an advantage. Or on the other hand if your display had a lousy conversion, it might be better to do it in the source. This is something that Sony usually does well, however.