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is this the PS3 PSone Classics version recently released in stores?
FF8 does look kinda shoddy on HD tvs but it fairs ok in SD and still looks great on PSP..
as for your stretching thing i think you need to adjust the screen mode for the PS3.
Press the PS button, under screen or settings and something like that, put normal or original and it should be better. zoom or stretch will look weird.
We all have rose tinted glasses when looking back i suppose. I think at the time the graphics were brill, but they do look blocky now. The gameplay is still excellent though. And we are all entitled to our own opinions, but I thought that 8 was far better in most ways than 7. I did prefer the materia of 7 to junctioning of 8 though!!