We found that HD DVD image quality on the movies we tested over an HDMI connection (and at 1080p resolution) appeared slightly better as compared to the Xbox 360 over component video (at 1080i resolution). Images were noticeably sharper when compared with the Xbox 360's images over component video at 720p resolution.
We noticed that those images were a little bit more crisp, and had a smidgeon more depth and detail in the costumes in The Phantom of the Opera, for example; and a brick wall in Mission Impossible: 3's chapter 7 - which was a problem spot for the Xbox 360 - rendered smoothly. Some colours seemed off, though; at times, I noticed in both of those movies skin tones redder than I would expect, for example.
HDMI and 1080p resolution may make less of an impact on how games appear than it does on how movies appear. This is because many games were created at 720p resolution; by contrast, all HD DVD movies are encoded at 1080p.
While we're not yet convinced that the Xbox 360 Elite would match the image quality of a dedicated HD DVD player, we look forward to doing a side-by-side comparison (as well as to checking out how the Xbox 360 Elite handles upconverting standard-def DVDs).
More important, we don't see anyone buying the Xbox 360 Elite solely for its high-def video playback. Its $480 price tag - not counting the extra $200 or so you'll pay for a HD DVD Player add-on drive - positions the Xbox 360 Elite squarely at the gamer audience. High-def playback over HDMI may be a nice bonus for movie playback, but only if you intend to buy the Xbox 360 Elite for multiple purposes.