If you have a high definition TV, there are two different types of video cables you can use from your XBox 360. How do they work?
First, take a look at this photo of the 6 cables going into the side of my high definition TV -
Starting from the bottom you have a red and white pair of plugs. These are the standard AUDIO plugs that you have on every stereo system. Red is always right. White is always left. That gives you left and right stereo sound.
Next is the yellow plug. This is the standard "all included" video plug that you see on most old TVs. It's what comes out of a VCR or DVD player. This is a LOW quality video signal. It's called "composite" - as in the one signal is a composite of all 3 colors.
Now, look at the top 3 plugs. These are the NEW types of signals that you use with a high definition video system. These are component signals. The red cable ONLY sends in red colors. The blue cable ONLY sends in blue colors. The green cable? Yup it ONLY sends in green colors. Because each cable is specifically focussing on one particular color stream, it can do it extremely well.
Note that the point of the cable set is not to plug in the yellow AND the red-green-blue set! The cable provides both so that no matter what kind of TV you have, the system will work. If you have a low end TV, you have the yellow plug and can see that low end signal. If you have a high definition TV, plug in the red-green-blue trio and you get the high end signal.
Note that some high definition TVs also support a squarish digital jack input for an even higher quality signal - but the XBox 360 cannout output that.