Alsone:Having owned a Denon 1940 myself, I can say I've never seen any of the problems you mention with upscaling, in fact the pictures on mine were always superb. (Although it only played a few discs before the thoughts of an upgrade to Blu Ray tempted me).
A read of the What HiFI review of the PS3 says that whilst capable, it does suffer from picture noise and lacks depth, and isn't a particularly good upscaler, something which seems at odds with what you've reported especially against the Denon. In fact if the PS3 review is accurate, the Denon should look better not worse in comparison.
The review was conducted before the 2.50 version of the firmware was released, so doesn't take the improvements into account. I've just a run a test with House of Flying Daggers since we all know what a good DVD this is. There's absolutely no doubt in my mind now, the PS3 is definitely a superior upscaler compared to the Onkyo 905. Before this update, there's no way this was true. So it's definitely possible that it is now better than the Denon 1940 with this improvement (although I don't have one to compare though Tallyho clearly does).
I know it might seem horrendous to the purist that a mere games console can surpass a quality dedicated DVD player, but remember, we're talking upscaling here which is essentially a processor intensive software routine which "fills in" detail where there is none compared to the original signal it's receiving. When you then consider the PS3 has a cell processor in it, an incredibly powerful processor, it's not actually too surprising that, when the software which carries out the upscaling is improved, backed with that processing power, it can actually surpass these other machines.
I would say, until you've actually seen both running, you can't really deny what all PS3 owners seem to be currently reporting.
EDIT - also remember we're talking comparatively as well. I'm sure the 1940 picture isn't "filled with noise" - certainly I was more than happy with the upscaling my Onkyo 905 was performing before. However, with the update, it's now clear from a comparison that there is some noise in the picture which isn't present when the PS3 is upscaling. It's not the picture was bad before, it's just the picture is now even better! I'd also like to add, Blu-Ray is still even better quality than the upscaled DVD for all those worried this might make Blu-Ray redundant!