Hi HSDEMONZ,
Yep you have misunderstood
Basically if you run R63 and connect to live to play online you are forced to do a free system update. This update installs several new system files including a new xbe.
This update is quite good as it has stopped all known hacks & cheats (for the moment at least). The current hack's & cheat's are making Kai a pain in the arse to play on, so we thought we would try and help out.
As more and more people get the update from going on live it causes a problem for the non live uses as the 2 versions can't connect to each other.
What I am doing is working on a loader for non live users that will allow them to select the retail or XBL version to play at game boot. It is purely optional and no one is forced to use it. It just opens up the amount of people that can play online with each other.
I am not sure if I should even be talking about this here as it may violate XS rules, but I did want to give you an anwser.
Cheers
Xboxgeek