Speaking to the Official Playstation Magazine, Rockstar's creative vice president, Dan Houser, noted that the Xbox 360's lack of a guaranteed hard drive poses a challenge for the development of Grand Theft Auto IV. When asked directly about the issue, Houser agreed that the hard drive issue presented limitations. It should be noted, however, that Houser elaborated that both the Playstation 3 and Xbox 360 have their share of challenges. As Houser put it, "both have their own particular pleasures and pains." What exactly these pleasures and pains are is anyone's guess.
For what it's worth, the version of Grand Theft Auto IV being shown to the press is running on an Xbox 360. Do with that what you will.