I am wondering a bit about this as well.
So the PS3 doesn't upconvert well? Although I have been so anti-Blu-Ray, I have been toying with a Blu-Ray purchase this Christmas. I had my HD-A2 for HD-DVD, but a lot of those HD-DVDs that I have I don't care if I keep or not. I'd like to have just 1 player in my theater, so my goal was to possibly get a PS3 and use it for Blu-Ray and SD movies, but if the PS3 is worse at upconverting than my HD-A2 (or even my good ol' Panasoniv S97 upconverting SD-DVD player) then I will need to look at other options....
I am using a Sanyo Z3 (720p) projector as well. I do see a difference in SD vs. HD even when the SD is upconverted, but the upconverted image is nice.
