My 20" Sony V50 is the best looking picture of any TV in the house for SD, including the GWII. But, the 20" doesn't exactly give you that theater feel. My point here is, that the smaller pictures are inherently going to look better if the set is of fairly high quality.
Assuming you don't stretch you SD on the GWII, you are looking at roughly a 50" picture (diagonally), compared to about 35" (realistically) for your 36" tube, which is around double the screen area, meaning that you would have to sit twice as far away from the GWII as the 36" tube in order for the comparison to be fair. I suspect you are probably looking at your 36" from maybe 10 feet away. I don't know about yours, but my GWII looks absolutely incredible at 20 feet away, like looking at a picture, even in SD mode.
This isn't the fault of the TV, it's that the SD picture quality is so poor, and the compression artifacts only make the problem worse. This is where HD comes into play. It allows you to sit closer to the TV while maintaining the same effective element/pixel size, thus enhancing the theater experience. SD simply cannot give the theater experience as you have to sit so far away to make it not look like crap.
You need to think of bigger TV's as nothing more than a magifying glass over a little low-resolution TV, because that is all you are really getting when you feed it SD signals. No matter how good the technology gets, low-res SD programming is going to look bad when magnified onto a 60" screen and you sitting right next to it.
For fun, do this, hit the picture-and-picture button on the remote and create two equal-sized pictures, put one of them to an unused input so it is simply black, then resize the other one to be 35" diagonally, then compare that picture quality to that of your 35" tube from your normal sitting position. I think you will find it fairly comparable in terms of sharpness, color, artifacting, etc. The tube will likely look a bit better due to better contrast and a brighter picture. Let's face it, it is tough to beat modern tube technology, but unfortunately tube-technology has reached it's limit in terms of size, if you want the bigger picture that HD and DVD sources can support, then you are going to have to sacrafice a little bit right now, but not near as much as you think you have sacraficed.