One of the biggest pieces of gossip to come out of the Obama transition is the tidbit that he's considering Hillary for Secretary of State. If the rumors prove true and Obama picks Hillary, he's probably taking a page from one of his favorite books Doris Kearns Goodwin's Team of Rivals, about Lincoln's cabinet.
Lyndon Johnson said "it's best to keep them in the tent pissing out than outside pissing in" (yeah, he was a weird guy). Though the literal interpretation of this doesn't work, it seems pretty solid. Obama doesn't want Hillary outside of his administration, or the press flocking to her to pass judgement on him.
People have said her support of the Iraq war ought to disqualify her... by such a standard none of the top contenders is qualified. It seems possible that Obama and Clinton won't mesh into an effective team, but I see nothing objectionable about the pick if the he thinks it's worth it.