Sit further back while watching it. Anytime you're dealing with interpolation to fit a higher resolution screen, you're dealing with a lot of fake information being added, causing for quality loss and blurriness. To remedy this, you can sit further away, making for higher perceived resolution. The closer you are to the screen, the less perceived resolution (or pixel density) you'll get.
This is why your iDevice screen looks better playing standard def video, because the pixel density of it is higher than the iMac's.
There's also the fact that ANY lcd screen will look less than optimal when not in native resolution. Running a CRT of same size as the 27 inch iMac and sitting at the same distance will cause for a better picture, because CRTs have no native resolution.