I feel the games look better output from the PS3, but not much. And yeah I hope they add the upconversion, not just for games but for DVD's as well. Standard DVD's lokk horrible (compared to a HD-DVD players upconversion).
The PS3 has the hardware to do it and could do it through sheer processing powwer anyways so there is no reason they can't add it, and I suspect it's among the most requested additions (I think they audio output needs attention to, for TrueHD audio).