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There are small capillary tubes inside the heater that will VERY easily plug up in a short amount of time.
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The other drawback, is reports of decreased water pressure.

I've been hearing the same issues since I started looking into them. Frequent backflowing is supposed to help with buildup of scale, and some houses are being run on them alone, but they're most useful as "boosters" in WCs far away from the main hot water tank and for jacuzzi tubs.

The idea is sound, I think they just need a bit more time to work out some kinks... the traditional way of leaving the "kettle boiling" all day just doesn't make a whole lot of sense.

Had a friend that used to turn off his 80 gallon (!?! - for a 700 sq. ft, 1 BR condo!?!) electric water heater whenever he didn't need it... he'd fire it up before showers and dishes, not sure it actually saved any money since it had to bring up a large volume of water up many more degrees than if it was being held at that temp, but he felt like he was stickin' it to the man... so who am I to say?

Bren R.