OK, I just adding software upscaling as a full-fledged feature for the next release. Both bicubic and lanczos upscaling is selectable, and you can enable it for SD content only, or if you’re feeling like making your CPU sweat, for all content (meaning 720p is upscaled to 1080p using the same algorithms, and — to my eyes, at least — little visual effect).
I think the next thing I want to look into on the quality front is ffmpeg’s ability to post-process. If you look at the bottom of this page, you’ll see what looks like a very impressive example of (I think) a deblocking filter. It even looks like the XBox XBMC code had preferences for post-processing (with mplayer), but they were lost in the port to Linux (which doesn’t use mplayer). If anyone out there has experience with ffmpeg and knows some good settings to use, please let me know.