I'm facing roughly the same questions.
My htpc runs mediaportal and I was under the impression it outputs all its content at the desktop res. I've seen no sign of resolution switching depending on the source, the vidcard probably does the upscaling automatically.
So basically, whatever's on the end of the hdmi cable believes it receive 1080p.
Then any upscaling or filters automatically assigned by the hardware processors (tv, amps, ...) to sd content aren't triggered.
And even if you can force the upscaling/filters on your hardware, it will still process an already upscaled 1080p frame, which is surely worse than working with the untouched sd frame.
Maybe I'm totally wrong in which case I would be glad to have your ideas on the subject.
Right now I'm using ffdshow's internal processing and avisynth through ffdshow to upscale/deblock etc.
That, unfortunately, mostly depends on CPU and not GPU. So in the case of an HTPC I'd say go for a big CPU. A big GPU is mostly usefull if you play with the same machine.
To have an idea, the quad 9400 in my HTPC can easily become saturated by deblocking/upscaling then sharpening sd to 1080p if you push the quality parameters too high.