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Unfortunately, no. Due to the fact that the 360 has analog component video outputs, Microsoft can't upscale DVDs to high definition. Perhaps if/when they release an HDMI/HDCP output cable, that feature will be added, but for now, if you have a high-def TV, get an upconverting DVD player, or an HD DVD player.
I feel your pain. Sure would be nice to have an all in one home entertainment solution in one little white box. Live and recorded TV, music, high-def movies, games... :?
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