If I remember correctly, the HDMI-equipped consoles do, but the older generations with the component video connection can't fire out DVDs at 1080p - although they can over Xbox's optional VGA cable.
Additionally, the Xbox 360 is a progressive scan DVD player that will output a 480p signal. As of now, even when using HDMI out, the Xbox 360 cannot upscale movies to higher resolutions... Thx maxxflinn
if you have a TV smaller than 40' you won't be able to notice the difference between 1080i and 1080p, do keep in mind that most HD broadcasting has a 1080i resolution,