When played on a PS3, PS1 and PS2 games look dramatically worse as the above video indicates. The big black box resizes the graphic output of 480i PS1/PS2 games at a lower resolution sans filtering causing screen artifacts and jagged edges. Like, jagged edges that somebody took a knife to. It appears the issue has nothing to do with the TV, cables, or your PS3 resolution setting, something only a firmware upgrade can fix.
[Thanks, Alondo; via PS3 Scene]