Looks like i solved my own problem. The morotola VIP1200 used by ATT does not allow multiple HD connections simultaneously (HDMI and Component).
I unplugged the HDMI and now the quality of slingbox on my iPhone is much better (not perfect, but a huge improvement).
Now the problem is, my TV is not connected. I'm going to buy some 'Y' splitters to send the component to both the TV and the Slingbox. It's really too bad that the Motorola box is limited as I will lose my HDMI.