i know what you mean. did the same thing with my ps2, with the same response. i just kept using my old tube tv for playing ps2 and sega and suchlike on. i still do, but only when there's something else on the flatpanel. but i've now plugged it into my a/v receiver via s-video and optical audio, and the receiver outputs to the tv via component HD and its a BIG improvement.
when i first bought my 360 i was absolutely amazed at the graphics, plugged it in via component on my 26-inch HD TFT (hey its not big but for a tenner

) and i was blown away. i then realised there was a switch on the cable that said HDTV. what an idiot. i shut it all down, flicked the switch, and rebooted it. felt like i had been slapped round the face by a wet fish.