The images were fakes... screenshots of an xbox running XBMC, being displayed on an xbox360 as photos...
However, since MS announced the new XNA framework/content creation studio, I'm rather sure that someone will come up with something... or at least I hope to hell that they do.
I too, hate transcoding, especially since my wifi connection to the 360 is terrible when it comes to throughput.
I understand WHY MS forbids MPEG4 codecs (DRM), but it's really not necessary to block such things. We can be grateful, I suppose, that things like Transcode360 exist, and MS hasn't wiped them off the map just yet.