ok, so I've tried installing the kinect+avatars patch (using the $$ method) and had no luck. the nxe said it failed updating. so I figures it was since I was on older kernel (14699) and not 14719 (which evantually appeared to be a false assumption, but whatever...)
Pressed eject to run Xell, and got the CPU key. Used Flash 360 on the console to get my NAND - BOOM! bad block on 038A - Enter heart failure number 1. After some reading I found out J-Runner can remap blocks automatically, so I used the NAND and KEY with J-Runner and created a new nand with 14719 kernel. Updated it using Xell (using DOK) - Bad Block and after shutting down the console and powering up using the joypad I got the Microsoft NXE. Enter heart failure 2.
Some more reading... found out microsoft NXE after upgrading kernel is ok, burned xexmenu to a cd, and from there fsd to see everything was ok. Now - how to run it from joypad power??
and guess... some more reading! ran dashlaunch again only to find out it's outdated. downloaded dashlaunch 2.32 and installed, now everything is ok, including ms update (using the $$ method) and kinect games.