Interpolation is never great on an image because it's the equivolent of taking a piece of silly putty ... putting an image on it, and then stretching it out. It loses image quality and the silly putty (or in this case Photoshop) doesn't know what information went there. You should always try to make sure that your project is 100% of the 300 DPI size or whatever DPI it should be.
On the other hand, there's a great software called Genuine Fractals and it's the only software I've found that actually works to increase the DPI on a photo. It doesn't do miracles, but it can take a medium sized pic and increase it's size. We use it all the time for cover shots.
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