According to an article at DigiTimes, Microsoft Taiwan has confirmed that the Xbox 360's new external HD DVD drive is just to play back movies and will not support games.
Microsoft Taiwan, in response to questions raised by Taiwan-based developers of on-line, PC and console games, has confirmed that the HD-DVD drive to be used with its Xbox 360 game console is to merely play back HD-DVD movies and not to support games on HD-DVD, according to industry sources.

Taiwan-based game developers think blue-laser support for games is key for the Xbox 360 to be competitive with the Sony PlayStation 3 (PS3) which will have a built-in Blu-ray Disc (BD) drive, the sources pointed out. These developers are disappointed that the external drive will not support games and feel unwelcomed by the HD-DVD interest group, the sources indicated.
The article also mentions that Microsoft is concerned that by putting games on HD DVD it may increase costs and decrease the stability of the software. If you'd like to read more, head on over to DigiTimes.