Casey Chestnut says 'what i want to know is how does MCE get its interface over to the XBox?'

This is a laymans answer: We ported the Media Center rendering engine to the XBox 360.  Instead of using a Remote Desktop / Terminal Server paradigm like we did with MCX v1 we send all of the 'stuff' which defines the UI over the wire to be parsed on the XBox 360.  All of the logic (i.e., managed code) stuff stays on the PC. Content (audio and video) is sent out of band and decoded locally on the XBox 360 as well.