Tony, I have this problem with DVDs, but it goes away with HDDVD. Although if you switch to component for HDDVD the problem will come back for SD DVDs because it doesn't upscale over componentHow does your 360 do with the Panny on standard DVDs? I've got a problem on my AE900, where games play fine over component but DVDs suffer flickering banding on the image. I have to swap to VGA to watch them. From what I've read I suspect I'll have the same problem with the HD-DVD drive (not had chance to test it yet).
So, I'd say test sd DVDs first and that'll tell you straight away. Otherwise I think it's personal preference.