Neither the PS3 nor the 360 can do any kind of hardware upscaling. The 360 upscales using one of it's CPU cores. This is handled fully by the OS, independent of the games. Upscaling on the PS3 is handled by one of the Cell SPE's. But unlike Microsoft, Sony left this up to the developers. They can use the SPE for upscaling, or they can use it for something else. It's too late now for Sony to add SPE upscaling through the OS, as that would break compatibility with many older games.
The so called "horizontal scaling" is just a software hack that allows for true interlaced field rendering. It makes it possible for developers to support 1080i while still using all the SPE's for other stuff. However this adds a *lot* of extra work for the developers. Don't expect to see many (if any) games that support this mode. The PS2 supported 1080i field rendering, but only two games ever included this mode; Gran Turismo 4 and God Of War 2.
