That would be correct. DVD would be output at 480 resolution, and then upconverted by the TV. DVD's native resolution is 480i or 480p.

If it looks better by using different settings, then I'd recommend doing that. BD-Wise is a feature that doesn't work for every situation, though it's a quick-set option that works as a solution for some people. Sometimes just upconverting the DVD to 720p and letting the TV's processor do the rest of the upconversion may work better than outputting the resolution from the player at the highest setting. I encourage people to experiment to find what works best for them, and if you'd like to post your results, that would be welcome!