This "scaling" (basically a digital zoom in or out) is where chips from companies like Faroujda or Genesis (now Silicon <something>) come in. The quality of the digital scaler varies quite a bit from one projector to the next...
... and THAT is where the complicated "where should I scale up to native resolution -- in the player, the receiver, or the projector" comes in when you go to plan and set up the system.
DVDs are 480... 480i, I guess. A progressive player can convert that to 480p, and an upscaling player can convert that to 720p or 1080i.
Some receivers can upscale as well. Most can't.
Nearly all projectors can upscale.
When you watch a DVD, you "know" what the resolution is going to be coming out the DVD, and you "know" that the projector is only going to display at its native resolution. Scaling is going to happen if they are different -- the challenge is to figure out where to scale.
Having the projector do all the work is often the easiest since you can feed different resolution signals in from different sources (VCR, regular TV, HDTV, DVD) and let the projector figure out what to scale up and down. Some projectors (the Sony PL51, for example) are reputed to do a crappy job of scaling analog inputs up, although they scale digital inputs (HDMI) just fine.
The fun never stops
