A little late to the party, but the reason for this is that the Xbox uses a flicker filter for 480i.
Since you already got a hard/softmodded Xbox, take a look at this thread https://web.archive.org/web/20180817202356/http://www.theisozone.com/forum/viewtopic.php?f=35&t=72006
Disabling the flicker filter either via XBMC (only works for games installed on the HDD, not for disc based games) or by patching the XBE files manually to remove the flicker filter should improve your picture. I don’t know if it improves the image enough to solve all your problems though.
I’ve done something similar to this for my Gamecube/Wii in the past, and achieved extremely good results.
A little off-topic but would you mind sharing your results? I’m interested in what this looks like with the GC/Wii. 🙂