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It will only damage the hardware in that it causes wear and tear just like an Xbox game. The only difference I know of is that the Xbox would be continually reading the DVD, where a game is read in spurts. It shouldn't really matter that much though.
You can buy a separate player if you want, but you probably won't notice the difference in casual watching. If you wanted you could even get the optional advanced A/V or high def. package. It would give you a better picture and digital surround sound. Personally I'd get a standalone player, but that's just my opinion.
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"Empirically observed covariation is a necessary but not sufficient condition for causality" - Edward Tufte
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