360GameSaves.com has discovered that if you have a way to copy your Xbox Live Arcade game files to your PC HD (XSata for those with a HD, Memory card transfer kit for those without, etc) and then burn them to a specific directory on a CD/DVD, they will run off of that burned CD or DVD when placed in your Xbox 360 with your profile loaded.
Before anyone starts feeling awkward, the games will only work in trial mode unless you have bought the game, so don't think you're gonna go and take XBLA for a ride on the free train. Apparently the unlock code for each title is keyed to your profile. So there you have it, if you have a core system and only a memory card, or just don't want to use HD space for your XBLA collection, you can now play all your XBLA titles via CD or DVD instead of having to swap them around or use up the entire card with just a game or two and not have room for bonus content (that would fit) or saves.
"We've made a little discovery here that may prove useful to 360 users without an expensive harddrive for their console.
Xbox Live Arcade Titles will execute when placed onto CDR/DVDR disks.
XBLA on HDD reside in this format on Partition3 of HardDrive. /Content/0000000000000000/*TitleID*/000D0000/*XBLA Game*
Burning this directory structure to any writable disk and placed in a console will populate the XBLA Menu with the titles on the disk. Of course, they will still run in TRIAL mode unless said console has purchased this content. However, we felt this was still useful for people with Memory Units that can only hold one title at a time or even people without any storage options at all.
Demos, Videos, Profiles, and Saves were also tested in this fashion but were not recognized by the system unfortunately. USB Drives and Memory Sticks also tested and not working for either XBLA or the latter." - 360GameSaves.com
Head on over to 360GameSaves at this link for all the details and a link to their discussion thread on the subject.