I think there is a upscaling option in the settings menu. XMB - Settings - Video (or playback or dvd) (Dont have mine on right now to be sure what it is under, sorry) Play around with the scaling options in there until you get a picture you like. I have a 60" 1080p and everything looks great on it. Except for Streaming movies. My internet is not fast enough for HD quality movies.
I agree, check your upscale settings. I have never had DVD playback issues, but have the upscale turned on.
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