The arcade will come with a recent kernel so you'd need the infectus chip to do the timing attack, downgrade your kernel and upgrade to version 1888 i believe. You then need the King Kong game which needs to be patched to run the shader exploit which then will boot linux.
You can install linux on the HDD and still use it for gamesaves as to boot linux you first need to run the King Kong disc again.
Hardware support isn't good right now. No 3D Acceleration, no WLAN (except linux supported USB-Sticks) and if I remember correctly only one cpu core can be utilized (might have mixed that up with the PS3
)
For now linux on the 360 is only for browsing the web, e-mail and really low level hardware programming.
EDIT:
For the HDD you could do what you said but you need sector 16 from an original 360 HDD.
yeah... you sure about what your saying?
SMP is supported...
you see 3 pinguins when linux boots meaning... can you guess?
mame etc works..
new 3d api has been released by tmbinc etc..
i believe that you won't be able to do it.. if i'm not mistaken.. the new arcades are also with an HDMI connector.. aka base kernel level of 19xx
so you can't downgrade to 1888 cause you'll get an error because it can't communicate with everything...
check xboxhacker for more info..