"I'm giving my 360 a proper going over getting ready for the official Ars review, and one thing we haven't talked about yet on the journals is the DVD player. Unlike the first Xbox, the 360 will play DVDs right out of the box, and the wireless controllers make a handy remote if you don't have the premium pack.
I've thrown a few discs at it, with mixed results. The good news is that it is a progressive scan DVD player, and so far it has played every burned DVD I've thrown at it. The bad news is the video quality just isn't that great. On Episode 3 it looked decent, but my Samsung progressive player blew it out of the water. On other discs I noticed so very apparent dithering and artifacts in the black areas of the screen.
While it's a nice bonus, don't expect this to replace a good DVD player in your home theater." [link]