There's no concrete proof of this here, but I came across an avsforum.com thread here (starts on page 5)

There is a certain poster here named "darknight" who might actually be some sort of 'behind the scenes' guy (game developer, hardware guy, i dunno) who appears to be legit - and he's saying that the PS3 does have a hardware scaler, but it's just not allowed to be used at the moment, for reasons he did not expound on. (Well, he did give one reason, and that was that Sony is just plain stupid or something to that effect )

I thought it was kind of interesting.

Edit: Nearly 500 posts!

Interesting, and looks legit.

If this is true, and Sony isn't allowing devs to utilize it, then it might as well not exist.

But it strikes me as the high school nerd claiming that his girlfriend goes to school in another state. Sure, it's possible, but is it likely?

This doesn't really seem likely to me, but who knows the unit is capable of upscaling standard dvds it just doesn't. The real question is WTF is wrong with sony. For 600 bucks the PS3 should have been able to do ALL this stuff without an update the first time I plugged it in.

Is there was one in there, why would they back down on a firmware fix? Because it would be 100% possible if there was. Maybe it adds heat and explodes!

from reading the thread on avs, it appears that it requires developer support. so even if they did release a firmware update to allow games to use the internal scaler developers of current games would have to release a patch to support 1080. just read darkknight's posts on avs if you are confused.