How about not being able to record shows?
I sort of don't understand the use of an xbox for an HTPC when the most crucial part is left out. If you have a home network and are able to stream shows from your desktop then an xbox seems great but if your building your first HTPC you'll be seriously undercutting yourself.
If you don't have a network I'd just get a $70 Philips DVD player that plays Divx file instead since it's exactly what your going to be doing with the xbox but alittle cheaper.
I think for a thin client application it should work fine. I will deffinately be using it for a front end for my sons room since he already has the xbox and it will save me from building yet another pc. His box is already chipped so that he can play the backups of games I bought for myself without destroying my disks.