Kanex says the Kanex XD can support 1080p should Apple ever issue an update. For now, depending on your device, setting it to output 720p might involve connecting it to another display first. We set a PlayStation 3 to 1080p and found that it was able to detect the iMac as an unsupported screen, and then automatically switched to 720p to allow us to lock-in the settings. We also had luck with the "Auto" resolution setting on a Sony HD camcorder.
Once you establish the proper resolution output, you need to connect the cables in order: plug the HDMI device into the Kanex XD, connect the Kanex XD's power cable, and then finally run the Mini DisplayPort cable from the Kanex XD to the iMac. The iMac should be turned on when you make the connection, and the signal will switch over automatically. For the most part the external signal remains separate from OS X and the hardware. You can still adjust the volume and screen brightness with the iMac's Bluetooth keyboard. You can also toggle between the external signal and OS X by typing Command-F2.
We tried a number of different devices with the Kanex XD and had almost universal success. We connected a PlayStation 3, an Xbox 360, a standalone Blu-ray player, a satellite cable box, and the Sony HD camcorder. Connected to the iMac individually via the Kanex XD, all worked as you would expect. The only quality issue came via the Blu-ray playback, both via the PS3 and the standalone player, where the picture quality drop-down to 720p was noticeable. Movies were still watchable, but the image was less detailed than we expected. In all cases, the audio passed through without trouble, although you only get stereo output from the iMac.
The only other problem came when we put an HDMI switch in between the Kanex XD and source devices. We had luck swapping between an Xbox 360 and a Blu-ray player. Our issue came with the satellite cable box, which couldn't establish a stable signal. We suspect the copy protection signal check didn't like making so many jumps between the source and final output. Switching manually isn't that much of a hassle, but it does add yet another damper to the convenience factor of using the iMac as a home entertainment hub.