You should test with Smoothing though. Your TV may well do both itself.
Yes, I did some more testing.
Now I've settled with letting the PS3 output everything at 1080p and the projector downscale them to it's native 720p.
I know it's against the philosophy of doing as little back and forth scaling as possible, but with Blu-ray's it actually isn't doing but only one scaling.
Some scenes, especially ones with high contrast horizontal lines showed some jaggies with PS3 Blu-ray@720p, while @1080p downscaled to 720p by the projector is clean of them, also resolution test images show a more stable image with no loss of detail compared to PS3@720p.
A scene where I easily detected the jaggies was for example on Open Season BD, in the very beginning where the girl is loading the back of the pick-up truck, there's some chrome coloured railing on the right of the backside of the car and it showed jaggies on PS3720p, whereas @1080p it was smooth. Same I notice on Casino Royale disc in some scene with a speedboat driving from left to right on the screen, there was jaggies on some chrome finishing of the boat.
With DVD*s and games the PS3 first scales to 1080p and the projector then to 720p, but I don't see a loss of quality with DVD's at all.
In fact I think DVD's look as good as when PS3 scaled them directly to 720p.
I might just imagine things, but it looks like they actually look quite a bit better now with 576i -> 1080p -> 720p scaling. No detail seem to be lost in the scaling chain, at least according to test images, so I'm happy with what my eyes tell me.
The main peeve with PS2 games being upscaled is just that the image aspect ratios seem to be a bit screwed in most games. 16:9 games appear a bit flat or narrow, depending on the setting, and I haven't yet found a setting that would be good. And I doubt I will, at least with this firmware version.
Haven't tested with scaling on and off yet, but I think I'll leave it a t on for time being, as it doesn't seem to soften the image too much.
The PS2 games do look very washed out compared to PS3 games and DVD's. Guess there's little to be done except adjust brightmness / contrast everytime I play a PS2 game.
Overall though, I'm very happy with what the 1.8 update brought. The DVD playback quality was the most disappointing before, whereas now it's better than my standalone Pioneer.
The DLNA is the no1. feature for me. No need to buy that bigger 2,5" HDD just now as I can free a lot of space from PS3 HDD now as I can just stream them from my PC.
Edit: Sorry for the bad english and typing errors, it's late....