Failure rate or not, 360 is by no means a EPIC fail or a bad system. Everyone I know who own's one has not had a ring of death. I believe they are just like cars, you abuse them and they will fail.
Forza 2 is the shit. It is quite challenging with some of the classes though. OH! Don't buy the SRT Charger, its fast but even with upgraded brakes and suspension, it sucks!
you plan on a 2v or 3v? Its been done with a 2v, but IMO, I would keep the 289, you can make just as much, even more power with a 289. they do have kits to install a 5spd behind a 289/302