The original Xbox by itself was nothing special, but modding it and installing XBMC turned it into a gold mine. Media players like WD TV, Apple TV, Roku, etc. are widespread now, but back then a set top box playing your video files wasn't possible until the modding community got hold of the Xbox. It was pretty awesome, it was like seeing and living in the future as you couldn't buy in stores what the xbox was doing as far as media library management and playback from a set top box was concerned. You'd have to wait years later to get that functionality in commercial devices.
At this point, I'm not sure I'd invest the time as I don't imagine the software is actively being updated anymore so prepare to be frustrated. You could do the MAME stuff on your PC if you just want something to play games. As far as XBMC goes, it was awesome back then but I wouldn't rely on it now as I'm not sure it would handle recent video formats and it'd choke on HD video files. But understanding those limitations, if you want to do it all as a project though, it'd be fun. I modded mine with a mod chip and 120GB hdd, good stuff.