mindblast: That's pretty much the whole point of Xbox 360 D-pad sucking, that you get those diagonal directions.
I guess it then depends completely on the game, whether you need the diagonals or not. D--pads in general seem quite poor by design, whether they are round or 4-way, as you use them merely by tilting your big fat thumb. That's why they are so much poorer than proper digital arcade sticks where the diagonals are easy to achieve and don't cause any problems.
I wonder how you can make some of those 720 degree rotational moves in Super Street Fighter 2 Turbo with such a 4-way D-pad? I already wondered the same before if trying to use a mere keyboard (arrow keys) to play the same game (PC version), which is probably even harder.