Yes.
Here's what came from the manual:
Video Adjustments
The AVR 254 uses leading-edge Faroudja DCDi Cinema video processing
technology, with incoming video upscaled to 1080p (up to 1080i
when component video outputs are used) for outstanding video quality,
even with older analog video sources. Faroudja DCDi Cinema’s Dual 3D
comb filters and 10-bit video processing eliminates the jagged edges
and moiré patterns seen with less advanced processing. Thanks to this
“Torino” video processing chip, on-screen graphics may be generated
in high definition, and blended with the incoming video. This not only
delivers crisp, clear information messages, it allows you to continue to
watch a program while making system adjustments.
The video processor automatically provides the best picture based on
the capabilities of your video display and the incoming source video
signals. However, you may experiment with the Video Modes menu
adjustments to try to improve the picture further.
Here's another one:
NOTES:
• Copy-protected sources are not available at the Component
Video Monitor Outputs.
• Standard and high-definition analog video signals are
upscaled to 1080i resolution for the Component Video
Monitor Outputs. For improved video performance, consider
upgrading to an HDMI-capable video display with 1080p
resolution.
So my understanding is that when playing game console (X-360) you can not upscale. Try a different source (not a game console) using the same connection type.
Read page 49 on your owners manual and if you're still having problem HK advice you to call them. DUE TO COMPLEXITY OF YOUR SYSTEM.