Borkachev on 14 October 2007
The problem was that there weren't any upscaling options and such before the firmware update. When the firmware was updated, the options were added in the options portion of the XMB, now they're available in-game and can be toggled when you're playing.
I was talking about the 1.5 update. Before that, there'd been an issue that made BC games look even worse than they did on their original systems, which is what that FFX video was about. (I assume you're talking about this one). The 1.5 update fixed this issue, so that the image quality would look like the right half (PS2 half) of that video. The upscaling/smoothing options were added later, in update 1.8. So in theory at least, PS1/2 games with upscaling/smoothing on should now look better than they did on their original systems.
