it'll do maybe one or two Diablo 2 rooms, but dont expect to get any real performance out of it. you could cluster a bunch of em together, but that would just be silly, be better off getting yourself a ~2.0ghz 2gb ram linux box and using that. besides, you'll still need a windows box for the frontend. (if you're using PvPgn & Bnetd) it's a 2 part thing, you need both. PvPgn is a windows app that controls the frontend (Chatroom, Matchmaking etc), and Bnetd is the backend, (the actual server you play on) and runs in linux.
Xbox linux isn't really useful for anything , unless your using xDSL for a webserver or something, i've found it to be more for the "Look what i can do" factor. Then again that was back when Xebian and Gentoox were the main ones, might have changed since then, i dunno.