Actually I think its somewhere inbetween - a little like Phillips PixelPlus system not to mention most of the other manufacturers have a similar system
I was under the impression that with most sources (depending on the actual set will depend on which connections do this and which dont) on an LCD it sort of got the info of what two pixels should look like and did an "educated guess" at what the middle one looked like - obviously not as good as a proper scaler but better than just stretching the image over a bigger resolution
Please correct this if Im wrong but I always thought this was how most worked (obviously the cheaper LCD's dont even do this, and they literally just stretch the signal as much as possible to keep the right proportions)