Yup it does. And doesn't do to bad a job of it either.
DIVX movies look good on my 1080P Viera Plasma. But no where near as good as Blu-rays...OMG :O
Watched Starship Troopers on Xmas day and Bladerunner last night. Blew me away.
Well the PS3 is outputting at whatever resolution you've got it - in my case 720p so it will be scaling anything with a lower res than that UP. Then the TV will also do some upscaling to make the picture fill the screen which is 768p.
The PS3 will scale up or down to 576i and then the TV will scale up to match its native res.
I guess what I mean is, unless you have a 1080P native monitor (or 1:1 pixel mapping) your TV will always have to do some scaling? (Assuming the video signal from your console never matches your TV res unless 1080P/720P/1:1 panel).
rp2000