You are absolutely right that there is an Intel Architecture PC inside. From what has been previously seen on the web, its an average powered system board by todays standards running Windows XP Embedded. I guess the nearest equivalent today would be an Atom-based system board with ION chipset.
The issue with the updates you requires which are predominately MPEG and VC-1 standards based, are that I'm not sure that either the underlying OS or the processing horsepower is sufficient to accommodate anything greater than DVD. I'm sure Blu-ray would be out of the question.
IMOP, the best solution currently is still an AppleTV which runs on fairly lowly hardware and could do with an upgrade itself, but at £200 you can hardly go wrong. The argument however is that with current broadband speeds, its 720p downloads are likely the best compromise. You'll hear others decry the sound quality, but take the Pepsi challenge and ignore the cost difference and I would bet money you'd hear little/no difference. Many B&O dealers now have AppleTVs as part of their demo capabilities so give it a try.