Yes, the keyboard does turn horizontal if you tilt it, when using Safari web browser, but not for texting.
I really feel like horizontal texting should be in the next update, it really should or somehow in an app.
dude I came from an htc phone and was REAL skeptical of the whole virtual keyboard. Mainly for the same reason you are. It looks really cramped and the lack of buttons was a turn off (but I had to have a new phone and mp3 player so...)