Q. Does the Xbox 360 upscale standard DVD movies?
A. Absolutely, but only if you’re using the VGA connection. During the so-called “Spring Dashboard Update” Microsoft enabled DVD upscaling over the VGA connection, so if you’re using VGA you’ll see movies in whatever resolution you’ve set in the dashboard. However, this is only over VGA. Also, with Fall Dashboard Update, standard DVD movies will be upscaled to 1080p on displays that support it, again only over the VGA connection.
Could be wrong about the composite but I could have sworn the TV was showing in 720p when watching DVD's as there is no resolution switching taking place when I switch to the dashboard and back to the DVD…