Unfortunately it's not a real HD projector... so displaying any widescreen HD content on it will reduce your resolution. It's still much better then SD or ED... but it's really in purgatory between being significantly better then ED but not as good as HD... it will ACCEPT an HD signal it's just not fully capable of displaying it in full detail.
You'll want to set your Xbox 360 to 1280x768 if you're using a VGA cable (set it in the dashboard under the system blade). Alternatively set it to 1280x720 and see which one looks better to you.
This will be sending it a full HD signal (1280x720) but your projector is only actually capable of displaying: 1080x608 (even less if you're using any digital keystoning)
If you can deal with a fullscreen image rather then a widescreen image you can set your Xbox to output at 1024x768 (which is what your projector is built for) But that wont be widescreen and as a result half of the games will render in 480p and upscale to that resolution while the others will render at 720p and downscale to that resolution with black bars top and bottom. A small handfull will actually render at the correct resolution.
Alternatively you might use component video output from your Xbox 360 with one of these on your projector: http://www.monoprice.com/products/product....at=2&style=http://www.monoprice.com/products/product....at=2&style=
in that case you'd want to set your output to 720p
You should experiment with different resolutions and different games and see which one looks the best on your particular projector. There's no good answer that I could give except you'll need to play around with it and see what works... that projector is really built for business/computer use, not home theater.