Hi Zombot, welcome to HDF!
Stick with the HDMI connection. It is the best for your purpose.
Your display seems to have a pixel resolution of 1366 x 768, so setting the htpc to 720p is ok for now. (If you could get 1:1 pixel mapping to work, it would be even better, but stick with 720p for now)
What kind of media are you trying to play back (DVD? Blu-ray/HD DVD? "internet movies"?)
What software are you using for playback?
Heavy grain can be part of the movie. Have you tried several movies?
Can you describe what you mean with the colors being terrible? Are they washed out or looking unnatural or is it something else?