Is 480i really that bad or is it my TV ?

Sounds normal to me.

You say you've had this TV for 3 years. Has this issue changed or gotten worse recently?

A "V-compression" feature that condenses the raster vertically on the TV to a 16x9 aspect (for anamorphic DVDs) would help. But it doesn't look like this model has one.

How much of your viewing is 16x9 widescreen content btw?

Huh. Yeah, that sounds exactly like the type of feature I was referring to. There's no mention of it in the brief description of your TV on Amazon.com.

Using the 16:9 Enhanced/V-compression on the TV should improve vertical detail and make the scanlines less noticeable on anamorphic widescreen DVDs, and eliminate any potential scaling/deinterlacing artifacts caused by the player performing the 16:9 conversion. So in general I'd recommend using it rather than letting the player perform the scaling. The AUTO setting on the TV would probably automatically detect whether a 4:3 or a 16:9 anamorphic signal is being received, and enable the vertical compression as needed, just like the player did previously.
Interesting. It sounds like the TV's 16:9 Enhanced feature may be cropping a little overscan from the top and bottom of the picture, in addition to condensing it into a 16:9 ratio. (Or perhaps it just condenses the image a little more than the player.)

Do you have any kind of calibration disk you can use to measure/compare the overscan between the two? If not, then you could just pause on a picture that has graphic details (eg text) that run off of the screen vertically, and see if there's more visible on the top and bottom when the player performs the 16:9 scaling. The COLOR/TINT SETUP screen in the THX Optimizer (a setup tool that can be found in the Extras on any THX-mastered DVD such as Star Wars or Indiana Jones, or Pixar films like The Incredibles or Monsters Inc...) might work for this, to give you a rough idea anyway.

Also, make sure you have the vertical letterbox scaling for 4:3 TVs disabled on the DVD player. If vertical scaling is enabled on both devices, then the picture will be very condensed indeed and you won't be getting the benefits you're after. (Sounds like you made this adjustment already though.)

In order to use 16:9 enhanced, I would set it to ON and simply send the anamorphic DVD in its raw form to the TV. You should get a higher quality image on your tube TV.

DVE is perfect. There's a pattern for checking overscan at Title 12, Chapter 17. I can't remember offhand if that overscan pattern normally displays as 4:3 or 16:9. If it defaults to 4:3, then you may need to "force" it to display as 16:9 on both your player and TV rather than using the 16:9 auto-detection features on both devices, if you take my meaning. The pattern is suitable for checking overscan on both 16:9 and 4:3 TVs though. A basic explanation of this pattern is contained under DVE's advanced video tutorials at Title 7, Chapter 12.

If you're happy with the picture as is however, then perhaps you may just want to leave well enough alone?

I've heard that this problem is typical of the old Sony TVs (if you do a Google search, you should find some info about it). I actually had the opposite problem on my newer Sony SDTV (KD-27FS170). I went into the service menu and used Avia to correct problem. On my TV, it's not quite as easy as it sounds, because changing the 16:9 vertical size also distorts the image. It wasn't really a problem; I just needed to adjust a couple of the other settings. I'm not familiar with the model you have, so it may have a completely different service menu. On mine, I needed to adjust VSIZ, TRAP, and PAMP in the 16:9 deflection submenu.

If you're in the neighborhood of 5%, then you're probably not doin badly for an SD display.

If you want to check for excessive distortion in the image as well, there are a couple aspect ratio tests (for both 4:3 and anamorphic 16:9 content) in the THX Optimizer.

But it's basically useless for checking the ratio of 16:9 enhanced mode on a 4:3 TV, isn't it? And I think that's what he needs to do. 16:9 mode has a vertical size control that could be set wrong. He should check that by using something he can measure easily, like Avia's patterns for 16:9 enhanced, the Earth in the Universal Studios logo, etc. BTW, my TV crops quite a bit from the top of the image in 16:9 enhanced mode, and I don't think much can be done about that.

Anode, if you want to be as simple as possible, then just throw in a Universal anamorphic DVD and make sure that the Earth isn't ovally.