First, I wouldn't use .vob files for streaming. I convert everything I have to a single .mp4 file using Handbrake. The version I mentioned has profiles built-in. The Xbox360 profile I use, I believe, has the same resolution as a standard DVD. It sounds more like he has network issues or rips his files using a poor piece of software.
The bottom line is, there are so many variables, so you have to do some playing around to find what works for you. My TV is a 42" full HD, but I don't need to worry about upscaling. My ripped files look as good as the original DVD. You can't add data to a digital file to make it bigger or better, so upscaling is something I have no interest in worrying about. The only alteration I do to the Handbrake profile is to change to use full surround.
My typical movie files end up around 1.5 to 2 GB each. My 360 can play them, and my new Samsung Blu-Ray player can play them from my server, and both look just as good as the original DVDs.