I have many different folders in "My videos" section containing mpg and avi files. Some of the movies I have are broken up into two files within a folder. So whenever I want to play a movie, after one file has finished playing it stops and then i have to use the remote in order to play the other file. Is it possible that after the first mpg file has finished playing, the other file will automatically start to play? So that every file within that folder can be played in sequence without having to press the start button on each individual file.

You need to enable file stacking & rename your files accordingly. See the xbmp manual for instructions.

You can also use the yellow "Y" button on the xbox controller to queue files to a playlist and play them from there. Dont know if you can use the remote to do the same but im sure its in the manual if you can.