Source-side scaling is almost always better than display-side scaling, and for the last 6 years the 360 has shown to do a great job at scaling. Any differences that you are seeing are likely to be settings related.
For example, on my 1024x768 plasma, feeding it 1024x768 over VGA was significantly sharper than 720p over component/HDMI. Black levels were different though, so I had to fiddle with those settings on the 360 and calibrate the display properly. This would explain a "vivid colors" issue that you are seeing, if your display treats resolutions differently in terms of calibration. On my 768p plasms, 1080p over HDMI was the best option as the TV did a better job of scaling down from 1080 to 768 than it did up from 720 to 1080. Geometry Wars 2 was sharp as hell with the 360 set to 1080, but kinda blurry set to 720p. On my current 1080p native display, the 360 set to 1080p is the best setting as the 360 knows what the source is and therefore scales the best, whereas the display would apply much more generic scaling that would maybe try to do some stupid temporal integration.
So, set the 360 to spit out your displays' native resolution, load up THX Optimizer on one of the DVDs that you already own, and calibrate your display. Without the calibration step, your eyes can not be trusted as your display is lying to them.