Well, in the absence of anyone willing to provide links to references, I found one on my own: http://www.beyond3d.com/content/articles/16/2
It's a well written article, and appears to be derived primarily from the developer community, which is a good thing as it is likely more authoritative as a result. Here is a quick summary of some of the highlights:
1. The latest SDK provides for horizontal, but not vertical scaling
2. Having only horizontal scaling doesn't allow for going from 720p to 1080i/p, but it does allow for going from a 720p-like resolution, 960x1080, to 1080i/p.
3. The author speculates this is implemented via a hardware scaler, but has no information to back it up
4. Specific details surrounding the scaling are being kept close-to-the-chest by both Sony and the developer community... the author vaguely refers to factors that are driving this, but refuses to elaborate
5. No information is currently available regarding future updates that would include vertical scaling
Switching 720p-native resolution data to the odd 960x1080 resolution is definitely possible, but could prove to be impractical for a variety of reasons. For PS3-exclusive titles, this could be a poor-man's way of getting 1080i/p upscaling, but it would definitely require a different approach to texture resolutions, etc.
It would be nice to know if Sony really does have a hardware scaler under the hood (or if the new SDK/firmware is simply using part of the Cell or GPU to do this), but for now it doesn't appear that we will have a definitive answer.
I am going to assume that there isn't a hardware scaler until someone produces a link demonstrating otherwise. Here's why:
1. If a hardware scaler is in the PS3, then it's a mystery why Sony would not have used it for both DVD/game upscaling (they're currently upscaling DVDs in software).
2. If the box has a scaler and they plan to provide access to it, then Sony would be much better off simply telling the Sony community that the PS3 has the hardware and that a solution is coming. Instead, they have decided to remain quiet on the subject, and according to the article, they have apparently asked their devs to do the same
