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The upscaling for video playback doesn't require the HD-DVD player, only an HDMI connection which allows for up to 1080p output for DVDs.

The only thing the HD-DVD player is for is to play HD-DVDs, and reduce wear and tear on your console optical drive if you also use it to watch DVDs.

HDCP restrictions will only allow DVD content to output at a max of 480p over anything other than HDMI. There's little point in using any other connection unless you have an early model 360 or an older TV without HDMI inputs.