Quotes have been taken from numerous interviews and articles about the demo and game. Citations are included at the end. All quotes are from 2003 unless indicated otherwise.
Planning and Development
Joe Staten (Director of Cinematics): When I started planning the E3 demo I found myself watching the Halo 2 announcement trailer over and over again. I find it's really helpful to look back on things we've done, and remind ourselves where we set the bar. We wrote ourselves a pretty big check with the announcement trailer - E3 will be our desperate attempt to cash it. 
Marty O'Donnell (Audio Director): A few of us got together early in the year to discuss what we needed to accomplish at E3. Lots of brainstorming and big crazy ideas (especially from Joe) which finally got winnowed down into a plan that was hopefully doable. At that point I started thinking about what sort of music and audio would be required to make it happen. Originally we thought that we’d do something similar to the 2001 Gamestock event where we had live gameplay choreographed to music being played off a CD. We weren’t sure how much of the new sound engine would be ready for a live test by May, but eventually we decided to have everything playing out of the Xbox from the Halo2 engine. 
Jaime Griesemer (Design Lead): We started planning for the demo back in February, and since we wanted to have as little impact on our overall schedule as possible, we wanted to use a level that was already in production. Of those levels, EARTHCITY had the largest range of gameplay options since it had infantry and vehicle combat. It was early in the game, so it wouldn’t reveal any major story secrets, and it had most of the vehicles and characters we wanted.
The best part about using EARTHCITY was that it was a natural place to pick up after the announcement trailer. It re-introduced the Marines and the Warthog, as well as providing a good place to bring in the Brutes. It was the obvious choice for the location.
Then Joe and I came up with a plan for the demo’s storyline. It’s surprising how closely the final demo is to the original plan. We had to abandon some of the really crazy ideas, but the main flow is the same. 
Joe Staten: The original script was pretty ambitious, and we were crazy enough to stick to it (much to the detriment of our sleep habits, hairlines and marital harmony). We really only cut one thing...and I'm not allowed to talk about it. Let's just say if you thought the Brute boarding the Warthog was cool, this would have been, without a doubt, too cool for school. Or at least too big to fit into the classroom. 
Hamilton Chu (Lead Producer): One of the things we've done a great job - or at least a better job - for this E3 is planning. So at this point in time, there are a lot of things that are much further along in Halo 2 than they were in Halo 1. The story is much further along, and a lot of the gameplay design is really far along, and inclusive in the planning for E3. For Halo 's first appearance at E3 [in 2000], we made this ten-minute movie full of cool stuff, but everything that was in it we ended up throwing away. 
Joe Staten: Events like E3 have the potential to become huge resource bonfires, so I decided early on that whatever intro cinematic we used for the demo, it would be the actual cinematic we'd use in the game. 
Michael Evans (Chief Engineer): The story is what drove the concept of the demo. It dictates the design. The engineers strive to make the tools and system that allow us to tell that story. For this demo, we needed to do it in a way that as real as possible (meaning we were building systems that were good for the actual game). Then in the end we have to make it all fit into a debug box that has no more cpu/graphics power then a normal. So in some ways it’s reality that dictates what we can do. It is then really everyone’s job to make sure that reality doesn’t get in the way of what we want to accomplish. 
Hamilton Chu: We had an opportunity to take this strategy of thinking of E3 as two things we need to accomplish: One, to whip things up into a frenzy, and two, make this a drive to achieve something that would help the rest of the project. We're using E3 as a red-hot poker jabbing into the enormous mountain of newspaper, kerosene, and sawdust that is the rest of the project. 
Joe Staten: Each time we put together a trailer or a demo our process becomes more refined, and at this point we have our act pretty much down. Everything starts with the script. The script serves the basis for storyboards on my side of things and a clear list of tasks for the engineers, artists and designers. This demo was really a mission-in-miniature, so while Tyson was working on the gameplay section, I assumed my usual role as the "bag man"--collecting and assembling cinematic assets as they came on-line, and eventually delivering a "frame-accurate" version of the entire demo to Marty and Jay [Weinland, Audio Lead] for music and foley. Throughout this assembly process Harold [Ryan, Test Manager] and the rest of the test team pounded on the demo checking it for stability, and it's interesting to note that the build never crashed during its 150+ showings. 
Dave Dunn (Lead environment Artist): Most of the challenges had to do with performance and time. Technically we were pushing the limits and we were always walking the fine line between our ideal art goals and our target gameplay experience goals. 
Damian Isla (Engineer): We spent a lot of time getting the driving right, and looking natural. In the demo the warthog was being told to go to certain waypoints, but was deciding for itself how to get there. There is a LOT of code in there to make sure that the warthog is accelerating and decelerating realistically, turning at an appropriate rate, rounding off its turns appropriately, etc. I think we got it to a point where it looks like a human might be driving it, which is super-cool! 
Joe Staten: Well, the one big difference [between this and the announcement trailer] is that this one's actually in real time, so everything needed to work, and not break. And to a large extent, that's true. There are certain things that will break, but from the cinematic point of view that meant that the scripting I did really had to tie in with the scripting Tyson did. It was the first union of our two different worlds, and sometimes it got pretty ugly, but it was really nice to do this early in the project, to get that working, because that was the big challenge, the link between the cinematic scripting and the level scripting. 
Shi Kai Wang (Lead 3D & Effects Artist): The biggest challenges revolved around an ever evolving game engine that continued to improve as we were creating assets so the target was always moving. 
Michael Evans: On a single piece of technology side, the lighting was and still is the big challenge for us. It is the largest, most performance intensive feature and we don’t have the luxury of being able to use a faster machine and/or video card. That was on top of the fact that we picked a level that, while being very cool and fitting into the next natural part of the story arc, was not an easy level for us to do. In the end, that worked out really well and taught us an enormous amount about what we have to work on. 
Joe Staten: Coordinating the efforts of dozens of guys across a number of functional areas. The E3 demo was truly a team effort. Very few people sat this one out, and it gets complicated when lots of folks are trying to cram art, code, etc. into a single build in a limited amount of time. Ideally you want to stagger things--have assets hit in a nice, neat, predictable order, but that's very hard to achieve. Inevitably there's a mad rush at the end as people try to get as many cool things into the demo as possible--not the best thing to have happen when Marty and I are trying to lock things down, and spend some quality time together polishing the dramatic details. 
"It took two in the nose, then dropped into the atmosphere."
Hilary Goldstein (IGN Editor) (from 2004): Each year Microsoft is good enough to offer journalists a pre-briefing, basically a rundown on what's going to happen at the press conference. So a few hours prior to the beginning of the Monday night show, we knew that there would be an eight-minute demo of Halo 2. Of course it would be at the end of the show, which made sitting through all of the other presentations almost unbearable. Not that there wasn't other great stuff -- this was Rare acquisition year -- but it's like watching an hour and a half of trailers before the feature movie begins. 
Joe Staten: It's an homage, really. Remember when we first showed you the Master Chief flying into the beach level on Halo [at Gamestock 2001]? We wanted to revisit that moment, but up the stakes to match the intensity of Halo 2's combat experience. This is an urban environment crawling with Covenant. The demo begins in a part of the city where the Marines are in particularly dire straits, and really need the Chief to drop in and liberally apply boot to ass. 
Martin O'Donnell: My favorite moment for this particular process was when our demo Xbox decided to revolt during the final dress rehearsal of the Microsoft Xbox Press Conference. The three VP’s looked a bit panicked. I, of course, was cool as a cucumber. 
Brian Jarrard (Community Lead) (from 2010): Probably my biggest stand-out memory was E3 2003 when we had the now infamous (and still awesome) Earth City demo, a majestic theater and we threw an awesome FanFest after-hours where we got a chance to cut loose with our fans. Jaime Griesemer went off script and was doing crazy demos in the theater. 
Joe Staten: Unfortunately, the thing that's missed most often (not by people who watch the demo, but by me who's playing it) is one of the damn Ghosts that appear right before the Marines' medical tents. The goal was to shoot the second of the two Ghosts in the air as it flips off the hood of the other Warthog, but invariably I would choke and miss "the shot" as it's become known around the office. Initially, I tried to convince people I was missing intentionally--that I was "cleansing my palette" for the next, and final pair of Ghosts. But when it became apparent that I couldn't make the shot even when bet significant amounts of cold, hard cash I had to admit that I (as Hamilton so politely put it) had no clutch. Indeed, in the run-through of the demo we're releasing on the web I miss the cursed shot, and one can almost hear the hearty jeers of my so-called Bungie brothers as I flail to explode the Ghost well after it hits the ground. 
Michael Evans: We made a choice almost a month ago to try and not cheat. Obviously, there's going to be some amount of cheating in anything, but there are many times where we had, well we could do this one way which would be easy, or we could do this another way which is gonna be actually useful after E3. We really tried to do that. That was especially terrifying in conjunction with framerate... it's pretty good now, and I think everybody up here on stage knows what it looked like three weeks ago. It's like a million times better. That was really rewarding to do in a non-fake way, because it puts us in this position where after E3 we can start making levels, and everything works really well, I can't tell you how exciting that is. It's so much fun to run around and play that thing [points at theater], I want to make five million more levels that are that cool. 
Tyson Green (Mission Designer): Nobody should expect a final level which plays or looks exactly the same as the demo we showed. That said, changes will be made to improve things, and not because the demo does things that we cannot actually do. Players looking forward to experiencing something at least as good as the demo will not be disappointed.
And remember, there was only five or so minutes of gameplay in the demo. The final level will be much larger. 
Hilary Goldstein (IGN Editor) (from 2004): It looked so good, seemed so brilliant, that a rather vocal number of journalists doubted that the demo was actually real. Some thought it was just one lone scripted cut-scene that wasn't the true game at all. I kid you not -- it was like UFO conspiracy theorists had supplanted videogame editors. And this went on throughout the three days of E3.
The whole "staged demo" fiasco continued through the end of E3. Because many believed it wasn't a true demo, there was a risk that Halo 2 wouldn't be considered eligible for E3 awards from various sites. See, most sites have a rule that they only give awards to games that they can play or are played by someone else -- as opposed to trailers.
At the last minute, literally as E3 was shutting down, various editors were gathered in the Halo 2 theater for a personal demo. Where the more public demo was a bit linear and was controlled behind the curtain our final demo was a bit different. We were actually allowed to offer suggestions on what to do. "Hey, toss a grenade into the medical tent." Sure enough, Master Chief can do that and kill his own wounded men. Throughout the demo we chimed in with a few variations just to make sure the game didn't explode. Thankfully, it worked just fine. 
Joe Staten: We came back from E3 with actually less than what we wanted too. We came back from E3 with a demo. We did not come back from E3 with a playable part of a level. That was really bad actually. That wasn't the goal. 
Shi Kai Wang (from 2010): The New Mombasa e3 trailer was such a hack that we felt horrible after we came back from the show. It just showed us that we had nothing, and the amount of work that we had to make ahead of us was astounding. Everything from boarding, double wielding, jackals offense formation, insertion pods. Most of those were all done for the trailer, none of them were really implemented in the engine. With clever hackery it was IN the engine, just not Implemented.
The high from the trailer died down real quick and led to the monumental task that we had ahead of us, a story that we didn’t understand, and gameplay features that we weren’t 100% sure of. 
Chris Butcher (From 2010): The graphics engine that we showed at E3 2003, driving around the Earth city... That entire graphics engine had to be thrown away, because you could never ship a game on the Xbox with it. Through putting ourselves through hell, we were able to do a five-minute demo of it, but after we came back from E3 we had to admit that this graphics engine was never going to work - it was never going to support the kind of environments that are really important for a Halo game. So we literally scrapped the entire graphics engine and started from scratch. 
Chris Carney (Lead Multiplayer Environment Artist) (from 2010): Even that whole environment, the Earth city, was way too big for the engine at the time. We ended up cutting out huge parts of geometry from that level, so you never actually saw that. 
Tyson Green (from 2010): Setting up the E3 2003 demo, which involved (among other things) madly deleting objects behind the person running the demo to keep perf up, writing a failsafe mechanism that would recover the demo in the event of a death or overturned Warthog, and one of my favorite hacks of all time in implementing the Ghost boarding sequence at the end. That hack (done entirely in script) was the first time we had boarding work in any capacity in engine. 
Adrian Perez (Engineer): This was taken in January ’03 with the graphics engine we went to E3 2003 with. The ‘pstencil’ engine as we called it just barely poked along at 30fps after herculean effort. After that E3 we decided that the geometry/lighting fidelity compromises we would have to make to do stencil were too great, and we went back to the more traditional lightmaps + shadow maps we used in halo 1. 
Demos Never Die. They're Just Missing In Action
Jason Jones (Project Lead) (In 2013): We could even pull out the old Halo 2 [E3 2003] demo. Like seven days before we went to E3, it was running at a steady five, ten frames per second… 
Frank O'Connor (from 2014): Yeah, we talked about [including the demo in the Master Chief Collection]. The content is all real, and it all functions. The problem is if you deviate from the safe, sort of bug-tested areas in any way, it immediately, instantly crashes. But we looked at it, and it was just, the experience itself, you may as well enjoy the video of Joe doing it. He’s playing the safe parts of it. If you deviate from that, you crash the game. 
IGN (Ryan McCaffrey) (from 2014): What about Halo 2’s infamous E3 2003 campaign demo that never made it into the final game? Might that be completed by 343 and included as bonus content with [the Master Chief Collection]? O’Connor replied that this was in fact something 343 looked into early on, but found that the remaining code is “so broken that…if Joe deviated a couple pixels in that Warthog run… it just breaks.” He added: “And the other part is that it’s demonstrating a bunch of stuff that isn’t actually in the game, like the way turrets work and the way dual wielding works. But it’s not completely out of the question for the future.” 
For even more (videos of multiple run throughs of the demo, the warm up video featuring Sergeant Johnson, screenshots of early versions, etc.), see the very next post in this thread.
 Making of the E3 Demo (June 20 2003) Bungie.net
 Lights. Camera. Action! (June 27 2003) Bungie.net
 Halo 2 Aural Pleasure (July 11 2003) Bungie.net
 Making the E3 Demo - Art (July 17 2003) Bungie.net
 Making the Halo 2 E3 Demo - Engineering (August 27 2003) Bungie.net
 Official Xbox Magazine June 2003 pgs 22-39 (via Halo.Bungie.Org)
 One Final Effort (April 16 2010) Bungie.net
 Covering Halo 2 - An Editor's Journey (September 9th, 2004) IGN
 Better Than Halo - Making Halo 2 (April 11 2010) Eurogamer
 Bungie FanFest 2003 Q&A Halo.Bungie.Org
 Frankie's post (May 11 2013) NeoGAF
 Bungie Co-Founder, Destiny Creator on 'Halo's Greatest Tragedy' (June 9 2013) IGN
 New Halo: Master Chief Collection Info (June 9 2014) IGN on Youtube
 Halo: The Master Chief Collection Announced for Xbox One (June 9 2014) IGN
 Behind the Scenes Making Halo 2 Bungie on Youtube