Yes, the pixelation is due to the HDTV (crappily) upscaling the Neo's image up to the display's native resolution, which is usually 720 or 1080 vertical pixels, compared to 240p (right?) from the Neo.
The only option is to find an external upscaler (like the XRGB), which will help retain picture quality, but for the most part you won't get the same kind of soft, yet sharp image you normally get from an SD CRT.
Personally, I don't mind pixelated video games. I mean, they're pixelated to begin with! No blur or or fuzziness just means the picture is more true. People who use emulator filters don't really appreciate vintage games...