Yes, the Sky HD box upscales SD content.
However, it's best to set it to output to 1080i, rather than AUTO, as you then get a steady native or upscaled feed to your TV/projector.
On AUTO, the changing in resolution between SD and HD content (which happens with adverts, too) can freak out your display. Some TVs, for example, can lose lock when this happens - the screen goes black before finding the picture again.