Tipster Larry B. pointed us to the above video, uploaded today, showing how installing games to your 360 hard drive will work. The process produces faster load times for you, but you still need to put the game in the tray (see the end of the video) to satisfy DRM protection.
Whomever is doing this isn't logged in, so no fleeting glances of avatars or anything like that. It sounds like this is running on a bona fide 360, because the familiar whine kicks in right when it starts downloading Grand Theft Auto IV.
New Xbox Experience: Game Installation Process [YouTube]