It depends. Most DVD players will look as good or better with interlaced (component or S-video) input as they will with progressive, in all likelihood, given that the X1 has the Faroudja chip built in.
I always try all possible connections of all my devices to see which is best. The results are occasionally surprising.
If I were buying an X1 I would not be going out to buy a new progressive DVD player up-front but would try one if it were convenient to do so.
I have a Samsung DVD player with progressive scan but am using the X1 for deinterlacing/scaling. It may be that a high end DVD player like the Denon can equal the job but I doubt that you'd see any perceptible difference. The Faroudja FLI2200 is a very high end processor and the additional circuitry is designed around it so you get a very balanced and integrated design. It's like using a center speaker from a different manufacturer than that of your main speakers. It may be a great speaker but it's not designed as a system. The X1 gives stunning results from a standard run of the mill DVD player (as long as it's working properly, of course).
WRT "s-video better than component" issue, there have been a number of reports of DVD players whose S-video output was better than its component output. Hence, any problem of this kind could be due to the DVD player as well as the projector.
My guess is that Infocus has done it right but I haven't tried it myself. I own an older Infocus projector and have a lot of respect for their video processing. Until recently, their color and contrast have been lacking, and the X1 (as well as the 7200) appears to address that issue.
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