Get an Xecuter chip in there and throw a 200GB HD in the thing, I use mine for playing back films (entire DVD collection compressed on computer and put on there), and have all my games copied to the HD as well, saves searching around for discs. I put this setup together inc the console for around £120 a year or two back.
XBMC is a great interface for it, has every function you need, every dashboard will have a built in FTP server so its incredibly simple to setup. Pick up a DVD-remote kit as well, they're only a couple of quid and are much better than a wired gamepad for playing back films. Another reason I like XBMC, I have my Xbox wired up via component cables, and XBMC runs in HD resolutions no problem.
They're brilliant media centres, I have one in my family room as well which is used purely for films. Easy for family to use with the MS Media Centre skin.
Games, the PGR & Burnout series are lots of fun, Halo 1/2 of course & Forza. Crimson Skies is a lot of fun as well.
If yours came with the original style controllers, do yourself a favor and pick up a later-design controller, much nicer to use, quite similar to the 360 controller actually.