Did you say the XBOX does not de-interlace DVD's at all (automatically goes to 480i output when playing DVD's), or did you say it de-interlaces poorly?
All DVD players initially decode the program material as interlaced, progressive players have a built in de-interlacer. With no de-interlacer the game/video device can still create and output game material as progressive, (with an HD tuner) output 1080i HDTV as-is, but output DVD material only as 480i (for NTSC).
Actually, I wouldn't put down the xbox so quickly. It can be an integral part of the HT system in regards to Media. It can play any type of video/audio format. View pictures/slideshow, stream media from another pc or the internet, even connect to shoutcast so you can listen to internet radio from all over the world. Play any region DVD in progressive scan and you can even check the weather. Its not that hard nor expensive to get this done too.