I just played my first PS2 game on my new 720p dlp front projector, and I must say I was very pleasantly surprised.
I thought it would be a pixelated mess, as I had seen when a PS2 had been connected to some LCD and plasma TV's.
But the games actually were a lot smoother looking than on my old standard definition TV!!!
I know it's the scaler and the deinterlacer of my projector doing the magic (a Faroudja DCDi, so it should be better than average), but I never thought my old PS2 games would now look like PS2,5 games
For example GT4 HAD VIRTUALLY NO MORE JAGGIES!! and the trademark PS2 shimmering had lessened considerably!!
Would the PS3 need only a good quality scaler/deinterlacer inside the machine to upscale old PS2 games to pretty, jaggiefree 1080p, and DVD's would benefit too. If your TV has less than good scaler/deinterlacer chip, your PS3 would do the job (I think it will anyway, as somehow I think you won't be able to select 480i or 576i as the output, propably the least it will allow would be 720p for HDTV displays, which sucks mildly because it'd be good to have the option to let your display process the 480i/576i media in case it does it better).