First off, the movies on the demo disk are most likely WMV format. You can't expect to just rename Mpeg files and have it work, like that.
The Xbox 360 probably plays certain videos without having to be modded. It juat a matter of figuring out what the 360 suports, and burning it to a disk, then going into video section of Xbox Dash and if you can see it there, it most likely can play it. Who knows maybe it already can play Mpegs and possibly AVC format. I don't have an Xbox 360 so I am not sure.
this topic is definatly gona close soon
Who knows some one may be able to exploit via Xbox Live Arcade. MS already knows about the game save feature, so that probably will not work this time. But if someone could find an exploit in one of the xbox Live Arcade Games like a buffer over flow on emulation for games like Galaga or somthing (just for example, not a real exploit), that alows excecution of unauthorized code. Then you could just have XBMC guys may a 360 port of XBMC. But I think that will be kind of wishfull thinking, since MS is probably really caustious about buffer overblows by now. But you never know
Has any one tried the original Xbox ndure exploit? I mean if xbox 360's emulation of orignal Xbox games are really good, perhaps they never fixed that exploit, but I have this feeling that if it were to work, it could damage your 360.