the big difference between HDMI/DVI and Component/VGA is a truely digital signal vs. alanog signal.
In the Xbox 360, all the GPU's outputs and stuff are in a purely digital form, they then get converted to an analog singal in the video encoder. Similarly, a HDTV takes in the analog signal and converts it abck to digital, to control the screen itself.
I work at a comapny that designs audio amplifiers, I know first hand the effects of converting from analog to digital and back, you lose quality. Unlike digital signals, there is a degree of uncertainty in an analog signal, and it often does not get correctly interpreted on the other end.
However, if you have a straight digital signal from the output device all the way to the TV, you are certian that the signal is getting there properly, without any distortion from outside sources, like RF interferance and other noise that plagues analog signals far worse than digital.
So, for the average joe, the difference is not that noticable, the data is the same (the onyl difference is the way it is transmitted), but for an A/V nut/audiophile like me, i can very easily see the diffrence