Yes it does,and damn well to in fact. I have a r0 PAL dvd that plays perfect in the xbox.But I wish I would have bought another region dongle though,I know you only get one chance at that.Hopefully they are coming out with a region defeating device soon .Hope this helps.
So, let me just clarify myself to be sure.... I can buy a region 2 PAl disc from the UK, rip it to my harddrive using DVDdecryptor and remove the region protection, then burn a new copy to DVD-R and it will play in the Xbox? thats cool.