The PS3 can play dvd's just fine, it doesn't come anywhere near as good as my XE1 but then that is one of the best upscalers i've seen. Have you had a look at the Toshiba XD-E500? 5* winner, and is getting great reviews everywhere for it's picture quality/upscaling abilities.
System: Samsung 46A786 (ISF SOON!), HUMAX FOXSAT HD, DENON 1909, PS3, TOSHIBA HD-XE1, MARANTZ CD5400, XBOX 360, MORDAUNT SHORT 914I, 905I, 903I & 309I, Logitech Harmony One.