1) If DVDs look awful on your HDTV then you had better invest in a decent scaler. DVD can look very very good on a decent HD set, but it needs to be scaled properly. If you are relying on the scaler that is built into your HDTV set, chances are it is pretty awful. If you see blocking and EE and other artefacts, then I will lay money on it being an average DVD player coupled with the very ordinary scaler built into your HDTV.
Go to a *decent* AV store and check out a terranex scaler running DVD on a hidef set, and I think your concerns about DVD looking bad on HD sets will disappear. Through a terranex scaler DVD on HDTV looks absolutely stunning.
If you can't afford a terranex, check out the DVDO ISCAN HD, it does an amazing job for the money. With on, especially if running SDI from a good DVD player, you will not see any blocking or artefacts.
If you aren't running a decent scaler with your HDTV set, you are really wasting the money you spent on the set.
To answer the other question, a HD version of any OT transfer is a must if you want it to look good on a HDTV and you *don't* have a good scaler.
The people doing the transfer could do a much better job of scaling up the video - even the paltry 277 available lines - than the awful internal scaler inside your HDTV. That way you could feed the TV a 'pre scaled' image that is now in native HDTV resolution.
I personally will need a 720P version for my particular setup to look as good as possible.