First things first. Yes, the Sky HD box includes an upscaler. It's usually set to 1080i (by Sky's installers), and yes, that means it upscales standard-definition 720 x 576 TV content to 1920 x 1080i.
However, this is the crucial point: your TV does the same thing. Or much the same thing, at any rate. In the case of your particular screen, it will automatically scale any 720 x 576 content it receives to 1024 x 768 (to match its own resolution). If it didn't do this, you'd find large black areas of screen on your image, as I explained in an earlier post. This isn't, by the way, a feature specific to your television: every flatscreen with a high resolution has its own scaling included. For example, a so-called Full HD plasma or LCD, such as the Pioneer PDP-LX508D, will scale 720 x 576 TV signals up to 1920 x 1080.
So what's the purpose of offboard upscalers? Simple: they offer the potential for better quality. You're correct, you can send your DVD pictures in to your TV in 'scaled' form. All that happens here is that you bypass the scaler in the TV - or at least, a portion of it. In theory, this could give you a better image, because it's possible that the upscaling in your DVD player is better than that in your TV set.
However (also as I think I said earlier) this isn't always the case. You can find that a good TV has better scaling than that included in a cheap DVD player. You should also try to avoid too much messing about with the original image: for example, in your case, what you're doing is upscaling 720 x 576 images to 1920 x 1080i (as interlaced content), only for your TV to then scale said pictures back down to 1024 x 768 to match its resolution. In most cases, with most TVs, I'd try to avoid that much complication.
Instead, you might find better results come from upscaling your DVD pictures to 720p (1280 x 720), as this is a closer match to the native resolution of your TV set. You're also likely to see fewer jaggies and better motion, because you'll be removing the burden of deinterlacing the picture (turning it into progressive scan) from your television.
And finally, to reiterate once more my earlier point about the Sky HD box: I really recommend you try this out before committing to it. It could be that the scaling in your Sky HD box is better than that of your TV - but it could equally be that your TV is already doing the job just as well, if not better.