Re: PS3 1.8 (upscaling is here)
Under 1.80, my player developed a serious glitch: intermittent loss of picture during PS2 game playback. I called tech support at Sony and I was advised to turn OFF upscaling and smoothing for PS2 games to work around it (i.e. no upscaling of older games). He wasn't sure if the upcoming update would solve the problem, but tech did say others have experienced the same problem. I hope 1.81 fixes it because the upscaling of PS2 games looks excellent when the picture doesn't cut out.
Regarding upscaled DVDs: I did an A/B comparison using a DVD I have two copies of (The Messenger), by syncing up the 2 discs simultaneously, playing one upscaled on the PS3 and the other at 480p on a Panasonic.
My conclusion was the upscaling improved PS3 playback over its own playback for standard DVDs. However, the DVD still looked better on my Panasonic DVD-F85 at 480p (not upscaled). In other words, the Panasonic picture was far superior than the PS3 without upscaling, but with upscaling the PS3 almost catches up to the Panasonic image.
I did this A/B comparison viewed on my Sony 34" XBR910 via HDMI-DVI HDCP input for the PS3, and component input for the Panasonic. The difference was most noticeable in color depth and grey tones, which were noticeably richer and more detailed and smoother in transitions using the Panasonic (without upscaling) compared to the less rich / less detailed image from the PS3 (upscaled).
My guess is the PS3 put its top quality parts into Blu Ray and game playback, but less so for standard DVD. When adding upscaling (v. 1.80), the PS3 picture for standard DVDs came close to the Panny's decent picture, but didn't quite meet it. Therefore I wouldn't recommend the PS3 version 1.80 as an upscaling DVD player, though I'm very pleased with it as a game and BD movie player (if only the cooling fan could be a bit quieter!).