Sorry, I should have clarified, I was using Home Sharing, so maybe the downscaling is happening on the computer side?
The AppleTV v2 can now downscale 1080p to 720p in real-time with the latest software update. This happens on the AppleTV, not on the computer running iTunes.
The iPad 2 will not transfer a 1080p video via iTunes; there is no automatic downscaling, requiring you to have two versions of the same movie if you want to be able to play it on the device.