SD picture quality on D* is pretty grim on large sets (42" or above), and the closer you sit, the worse it will look. Some SD is borderline unwatchable, some is "tolerable", and it varies both between and within channels. By that I mean sometime a given channel will be poor, but will get better when the allocate more bandwidth to it. Other channels are ALWAYS terrible in SD and there isn't anything you can do about it.
I only watch news programs in SD (MSNBC/CNN and when I can tolerate it FOX News). I'm so used to HD quality that I don't enjoy watching SD unless the programming is compelling (and there isn't much of that)
Some of the HD programming can be impressive at times, but most of the time it is HD-Lite (bit starved) . If you have access to OTA, you can see what HD is supposed to look like. That said, HD via D* is FAR SUPERIOR to SD, to be sure, so enjoy it. (I do).
I don't watch in pillar box (side bars). I've gotten used to the "stretch" mode and unless it looks just awful, I don't switch to pillar box mode. It's all a matter of personal preference, nothing more. (unless you are worried about burn in with your plasma...I don't have that problem with DLP).
Your 35" looked good because it was smaller....take a poor quality source and "magnify" it ...and it is going to look poor...there is literally nothing you can do except back up further. The further you get away from SD, the better it looks. As someone over at avs forum pointed out to me a long time ago, "You didn't buy a nice, large HD TV to watch SD...so get over it." As harsh as that sounds....he was right. There is plenty of HD material out there now...I find very little need to watch SD, and when I do, I just grin and bear it.