Is it just me or does TNG not look very good in the dvd format?
It's not just you, TNG looks terrible, particularly on modern HDTVs where the imperfections are upscaled. Viewing on a normal CRT television is not so bad, mind you.
The main reasons have been covered, but it's also worth pointing out that TNG seasons 1 and 2 were edited on analogue videotape, whereas they switched to digital video tape thereafter (and continued until the end of Voyager). Thus TNG season 1 and 2 look far worse than 3 to 7, so it takes some adjusting to if you've not seen them for a while!
To be fair, a lot of the shots that are just plain footage are okay
(see: above screenshots), but any effects shot where there's been some multipass photography / compositing can look especially blurry. Space shots, in particular, seem to suffer from weird blue glowing edges of the screen.
I would love to see this series remastered but I won't be holding my breath for it to happen.
For some idea of what it would look like restored, wait for the inevitable release of season 4 of Enterprise on Blu-ray -- These Are The Voyages
in particular. There's some old stock footage cleaned up and rescanned for that episode, plus all the spangly new CGI. Terrible episode, but technically interesting, and about as good as the Ent-D likely to look for a long while.