Well... I can't set you straight on all of it. I have specifically avoided upconverting DVD players because, as you have found out, projectors already do scaling work internally that sometimes does a far better job than even a good DVD player does with the signal.
I would definitely give the DVI a try though if you have it already. The image will still go through the same processor, but it does not appear that DCDi processing may be applied - at least to 720p - not sure on 1080i. LOOK HERE:
http://www.av-outlet.com/en-us/dept_335.html But, the Denon may do a very good job taking the DVD video and upconverting it to 720p/1080i. Plus, the digital interface sometimes allows for a little better quality signal to reach the projector.
The problem is that there is no way to know until you test it. Two DVD players from Denon may not even give you the same results on the same projector if they use different processing. So, with so many variables, it is only possible for you to know for sure, by hooking things up and testing it yourself.
You are correct about the video sent over the component video connection. Composite, S-Video, and Component Video are all analog connections. Anything found on those lines is analog, not digital. DVI & HDMI are digital and are (almost) exclusively used for digital information. DVI has an analog allowance, but you are very unlikely to see it or use it, so you can pretend it doesn't exist to keep things more simple.