Of course a conversation like that could go on forever, but I'll try and break it down a bit, see if we agree on the basics.
AXIOM I: The bitsream you read with the xbox is not different than what a CD or DVD player would read.
I agree that the DVD-ROM of the xbox is not dedicated to CD's, but there is no reason to assume that it reads an incorrect bitstream from the disk. Even if that was the case, you can safely assume that error correction kicks in.
AXIOM II: The bitstream remains unchanged until it leaves the xbox, mainly due to its digital nature.
There is a lot of "electro-smog" in all devices, be it from power supplies, mobile phones, etc. I grant you for the sake of argument that the xbox is particularly susceptible to EMI. I also agree that most hifi components do a pretty decent job of protecting the signal from interference. However, the signal you read with the xbox is digital. It is therefore very resilient to EMI or low quality components.
AXIOM III: The output of the preamplifier you use with the xbox (normally the heart of your hifi system) is not worse than a common hi-fi CD player's analog output.
So now we arrive at the receiver, which will serve as a signal decoder. We can safely argue that the D/A converters of most (if not all) hifi preamplifiers are of better quality and performance than those of most common CD players. I have also observed (with disgust) many expensive "hifi" CD players use the same D/A converters with cheap every-day CD players. No matter what final stages you put on them, the chip that converts the signal to analog is the same... You being a purist, I assume you will let the preamp simply decode the PCM to analog, without modifying it in any other way.
AXIOM IV: All other parameters are comparable
I assume now that you would use the same power amp for both the CD player and the xbox, so all other parameters are the same. A notable exception is that it is very common to have an A/V amp, combining a preamp and a power amp, in which case you require no interconnects with the xbox, as you do with a separate CD player. That is the case with Mr Ed's DSP-A1.
I hope I convinced you that there is no tangible reason to assume you loose quality using the xbox as a hifi source. And trust me when I say that if a hifi modder offers to mod your box for hifi sound, he will probably make it worse...
Edit: axioms placed before explanations, rather than after
