Can I Play Xbox Online with My Friend if He Downloads a Game on Demand and I Have the Real Cd Bought Copy?

Yep. The download and the disc are the exact same game – the console doesn't know the difference.

Suggestion:

ye cuz he has the exact game as u but urs in on a physical disc and his is just the file of the game
i know because i play gta episodes on my cd with my friend who bought it from market place.
his copy of the game is just a file