I already tried changing the display settings. (And they were not set to HD anyways, because I don't have an HD TV and I didn'tget a compulsive urge to lieto my XBOX during the initial setup.)

I'm not bashing halo... I'm just trying to figure out whats wrong with my setup thats causing the terrible picture quality.

I don't have an HD TV but I have heard that the picture quality is alright. What I am experiencing is NOT alright. The picture is terribly grainy with digital noise all over the screen. Pre-rendered CGI scenes (such as those for the movies that play as the disk initially loads) are fine.

I've tried different TVs with the same result... is there something wrong with my xbox 360? (I've noticed this with gears of war and bioshock to a (much) lesser extent)

First off... DMC has been basically confirmed as being a multi-platform game... and any company that does not have explicit contracts with Sony would be foolish not to go multi-platform as it essentially is opening you up to (nearly, but not quite) double the market with minimal added development costs.

 MGS4 has been heavily rumored to be heading multi-platform. Remember when Kojima stood criticized Sony for their lack of cohesive online gameplay, taking away the rumble, and other practices while standing in front of a bit poster with Xbox 360 logos scattered about the back?

I am unsure of the Rumors regarding FFXIII, but for that game I believe a multi-platform jump would be less likely, but still not outside the realm of reason. The only games that I really can see remaining profitable PS3 exclusives would be traditional RPGS and other games that primarily appeal to the japanese market. Sony is far bigger than Microsoft in Japan, so if we lose these key exclusives that is really the only reason to keep the system. There are still some great games in that bunch, Xenosaga was one on the PS2. But even with those games, the really popular ones will probably be profitable enough to make multi-platform.

Just thinking from the developers standpoint... there is no reason to make an exclusive game with systems so similar, so unless it relies heavily on the PS3's superior handle on physics, or appeals primarily to the Japanese audience, or Sony writes the company in question a check exceeding the amount they would gain in profit by going multi-platform, exclusives seem really ridiculous. Companies want to make money, and exclusives don't do that. 

To make matters worse, the Xbox 360 is being offered basically as a PS3 with its new rumored super version. It is black, has black controllers, has a 120 gig HD, and HDMI ports with bundled cables. Basically, it is a PS3... with an Xbox Logo. Microsoft is handling itself rather flawlessly in this Next-Gen war, as much as I hate to admit it... They are bagging the exclusives one by one, and are basically toppelling the list of advantages that the PS3 used to have over its system.

So... What Can Sony Do?

 They need to drop the price to at least get an even shot at the game. My suggestion is that they offer a PS3 without the Blu-ray disk drive at a price comparable to that of the Xbox 360. Otherwise... when most games will "eventually" be ported to be multi-platform, what is the point buying the system. I'm a big sony Fanboy, and a big Microsoft evilness hater... but I like my money and my games, and I would like to have as much of both as possible.