Depends if you play them in 1:1 mode or stretched mode. In 1:1 mode, DS games actually look quite brilliant with the 3DS's higher pixel density, especially those whose graphics are primarily hand-drawn 2D artwork (Yoshi's Island DS, the Mario and Luigi games, and Chrono Trigger, to name just a few). However, this comes at the expense of the game being forced into a tiny window.Weren't people complaining that DS games look worse when played on the 3DS?
The other option is to stretch the games to fill the 3DS's screens, which unavoidably blurs the graphics a little. The filter that does this is quite impressive for what it is, but nothing compares to 1:1 rendering. That said, games that are heavy on polygonal 3D barely suffer from this - Super Mario 64 DS and the two Zelda games look pretty much the same. But pop in a hand-drawn 2D game, and...well, yeah.
You know what's awesome? I predicted how the 3DS's backwards compatibility with DS games would work way back in September last year - and got every bit of it spot on. The article's quite old now, but the visual mockups I prepared for it are still current.
I read it!Upscaling does nothing to improve the quality/looks of the image, in fact, upscaling will reduce the quality of the image compared to playing the game on an SDTV. All it is used for is resizing the image to fill the screen. Without upscaling, Wii games would be played in a very small window in the center of your TV. Your TV does upscaling already. If it is a big TV, it likely has a good upscaler (Which means an upscaler that looses less of the image quality).
Yes, it is a compatibility issue.
Maybe I should try to post less of a wall of text next time cause it seems no one reads it.
All of this was answered already.