Okay..I think I found a sure fireway to play DVDs at 1080i with the xbox. Using XBMC I disabled the FTP and the option for Internet Time Sync then rebooted directly to XBMC. I set the res to 1080i and tried playing A-v-P from the HD. Instead of locking up, I saw the LED go out, (which is good because I set XBMC to shut off LED when video is playing), it started playing. Next, I tried The Incredibles from the DVD drive.... It worked too.
I am definitely going to get a RAM upgrade. I think the 1080i playback on XBMC is limited by the amount of free memory.
These pics are really big and I am too lazy to resize them so I am posting links insted of embedding them.
OneTwoNOTE-- The pictures are no so much to show the quality of playback as my monitor and camera suck. The pics are just to show it worked.
I am using the Dec 10th CVS build