I have installed XDSl on my harddrive, within the apps section and I simply load it from the apps menu or from the XBMC Programs menu.
It installs somewhere in a folder called KNOPPIX and if you download XDSL the readme file is quite straightforward, it will tell you how to install it like I have done.
Alternatively I know most of the Xbox Linux distros run off a disk too, only all I've done like that is load the linux (both Xubuntu and XDSL) disk on my xbox, and played with the programs, I never did any saving or downloading off a live disk so not sure where it would save it etc. Shouldnt be a problem though saving and stuff.
Linux on the Xbox is cool, snip a controller cable and wire up a USB cable and USB hub straight off your game plug, no need to hardwire a usb port or anything, then you got Keyboard and Mouse etc!! (of course hard usb ports look cool though!)
ps - sorry, yes I havent had to do anything like downgrade my dash or kernel, just worked all good for me!