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LED/LCD TV Recommendations
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To expand on that point, the maximum resolution composite cables are capable of transmitting is 480i (640x480 interlaced), which is the NTSC SDTV resolution. Anything developed for display on an SDTV is coded in a resolution of 640x480. Component cables have a resolution of 1080p (1920x1080 progressive scan).
This means that using composite cables on an 1080p HDTV, you're blowing up an image to 3x the size, so it's going to become distorted in some way, usually blurring or jagged edges, depending on the upscaling. Displaying an SD signal through component cables only gives you the advantage of 480p vs 480i. Progressive scan refreshes every line per screen refresh, while interlaced does every other line, so it is an improvement in the quality of the video, but it still has the same effect in resizing the image.
Lastly, depending on the television, you could run the SD signal at native resolution on the HDTV (so it would be a small box with a lot of space around it). This will look more accurate, but still not quite the same as a CRT, as there's a level of distortion caused by LCD displays (hence why on LCD monitors you need antialiasing for text, whereas it's just annoying on CRTs.
This means that using composite cables on an 1080p HDTV, you're blowing up an image to 3x the size, so it's going to become distorted in some way, usually blurring or jagged edges, depending on the upscaling. Displaying an SD signal through component cables only gives you the advantage of 480p vs 480i. Progressive scan refreshes every line per screen refresh, while interlaced does every other line, so it is an improvement in the quality of the video, but it still has the same effect in resizing the image.
Lastly, depending on the television, you could run the SD signal at native resolution on the HDTV (so it would be a small box with a lot of space around it). This will look more accurate, but still not quite the same as a CRT, as there's a level of distortion caused by LCD displays (hence why on LCD monitors you need antialiasing for text, whereas it's just annoying on CRTs.
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A few things can go into grainy or pixelation presentation. The main cause is the content. If the content was produced to be displayed on a CRT at a low resolution, it will always look better on a SDTV CRT. (This is why older gaming systems still look better on a CRT -- they were optimized for them). When you put low definition content on a high definition display it's never going to look right.
When connecting output devices to a HDTV you should always choose the highest quality output that device is capable of. Your sister may have her DirecTV receiver connected to her HDTV with a coaxial cable, or even a composite cable, which doesn't take advantage of her HDTV. It may also be that she doesn't have the HD receiver -- the last time I had DirecTV you could choose between low-end and higher-end receivers.
Bottom line is, because you will be sometimes viewing content created for older SDTV devices on your new HDTV, it's not always going to look better.
Hooking up your PS3 or 360 with HDMI on your new TV will be worth it though... droool... it's so much better.