luke, actually PS3 does exactly what other DVD upconvert players do, it upconverts to an HD resolution.
we have a DVD upconvert player n a PS3, i checked DVD movies on the same HDTV as well as our old Nov '04 720p HDTV. Only difference is that some DVD movies will have motion blur on the PS3, i think. The only movie that had motion blur or a lot of ghosting for some reason was "I am Legend". I have to try other movies to confirm but ideally PS3 does work the same way as a DVD upconverter.
as for PS1/PS2 games, those actually get upscaled, not converted, so the games can look horrible then 480p.