It should extend all features of WMC. But, WMC doesn't natively handle MKV, so you'll likely be out of luck in that department without using some other piece of software on the XBOX or using an alternative media player for things like custom rips in unsupported formats.

That's the nature of the beast at the moment. I've been looking into this solution as an eventual replacement for my SageTV PVR and its extenders since Google's acquisition. WMC + XBOX360 is the only game in town unfortunately. I don't want a PC connected directly to my TV with its maintenance issues and drivers, plus I really need to have a central PVR capable of serving at least 2 TVs elsewhere in the house.