From what I understand, each pixel gets "squared" by the value of the slider before being handed to D3D for processing. A 2 will represent each original pixel as 2x2 or 4 pixels, 9 for 3, 16 for 4, 25 for 5, etc. This should reduce the amount of fuzziness caused by the filters, as well as being helpful in other circumstances (like matching game output screens to fixed resolution displays, such as LCD panels.)
RandyT