I can't update it...so my question is "Would this machine make a good HTPC?"
Yes, things got to be very stable Mac home theater-wise in Lion and are still stable, I run XBMC on one 2011 Mini that's so rock solid as an HTPC I have been loathe to upgrade it, but that's also because we have other Macs in the house on Mountain Lion (that can be upgraded to Mavericks eventually.) Your Mac Pro is still powerful enough to handle anything you can throw at it in terms of HTPC, you'd go DVI to HDMI and run optical audio to your AVR, there's lots of internal room for storage and optical drives, which means you won't have to buy external enclosures to house them. Biggest downsides for home theater, well, it is big, you have to put somewhere, it isn't as easy to control as a Mini would be with the little Apple remote since there's no built-in IR but there are work-arounds for that and iOS apps for remote control that many like. And those iOS apps mean you could stick the Mac Pro in a different room or closet altogether if you wanted and just sit on your couch with an iPhone or iPad controlling things.
It seems to me you have 2 choices: 1) sell it now while it's at its peak resale value and get something with a much smaller footprint like a 2012 Mini that will continue to be actively supported for years to come or 2) hold onto it, start using it as an HTPC now as you learn the ropes with the intention to repurpose it as a whole house media server when you eventually buy a 2014 Mini for the living room (assuming there is a 2014 Mini at some point…) The biggest advantage of the Mac Pro is you can keep putting bigger drives in that thing as your media collection grows.
I also have a few movies that were backed up into an iso format so I'd also be able to want to watch those. Someone told me to look into XBMC for this
XBMC will play .iso just fine.
I would also like to add a blu ray player if possible.
That machine should be able to rip blu ray discs with MakeMKV and XBMC should be able to play back the full-size .mkvs just fine.
I want a tv tuner that will...record those ota channels hopefully by using a program guide.
EyeTV in Lion is/was very solid, any number of compatible tuners are available to record ATSC with it.
Use it for Netflix, Amazon Prime, Hulu Plus, and probably a few other apps like that.
You can do all that within Safari, rather than an "app" per se; have to admit, though, that I haven't done those in the living room in ages, when I want to stream I do it with an iPad, Apple TV and/or Airplay.
I guess your choice really comes down to how much could you resell it for? If you could get enough for it to pick up a used 2011/2012 Mini plus an iPad plus an Apple TV, I'd find that tough to pass up...