Finally - managed to solve my problem.
Action Replay does not recognize all usb devices that the xbox does. I have a and the action replay would just not recognize it (when you plug it in the usb the big grey circle in the top of the screen does not turn green - that's how you know it's working).
I tried every single version of AR existing on earth, including hacked ones, mega-x-key etc..
and yes - I am sure i've modified the drivers correctly as the device manager would show an action-replay device and not a usb drive.
The solution - burn yourself a live cd of xebian, transfer the files that way (and I recommend softmod installer deluxe as it has all the files in a savegame format - simple copy to the usb device).
some links to this method:
http://forums.xbox-scene.com/index.php?showtopic=348096http://www.xbox-linux.org/wiki/Xebian_HOWTOIf you're xbox is recognizing your usb key but AR does not - just use this method instead.