Rob,
You sound really unhappy with the BV7 but, whatever your magistrate friend tells you, I do not think you are likely to be successful with an unfit for purpose claim after two years. If you are that unhappy I suggest you either try an HD service such as Sky (have you checked the signal strength your DTV tuner is picking up?) or cut your losses now and trade the TV in or sell it privately and buy something else.
Your comments about lag are an issue with LCDs (of all types) and different people respond to it in different ways. And I believe it is a bigger issue if you are running SD signals (digital or otherwise) into a 1080 screen. If you search other (non-B&O) AV forums on the web you will find many conclude that the worse possible results are obtained running SD on 1080 - 720 seems to be OK but 1080 scaling is just too much.
I'm also not sure that comparing a DVD result on a BV7 to a Sony or Panasonic is actually that meaningful either. Each set uses its own proprietary scaling/driver software and hardware and each is likely to handle different aspects of the image in a different way. What I mean is that what the BV7 does well, the Sony may do badly, and vice versa.
For what it is worth, I have a BV6 and use DTV. If I sit real close to the screen I see some really pixellated movement at times. So much so I think, why did I replace the CRT! However, from my normal viewing distance it just isn't noticeable. But this is only a 26" screen (more than big enough for me as I don't like TVs that take over the room) and it is a 720 screen, not a 1080. And for every image that looks poor on the LCD, compared to my previous CRT, there's another that looks better.