Mike, that makes sense concerning the vapor drive. I wonder how big an issue that really is... it seems like most stud frames with no insulation on the outside of the studs would be in the same boat. The same with log cabins. I'll have to do some research on whether that has ever been a significant issue.
Like D Wagstaff pointed out, they do it in Europe. I'm sure that they have retrofitted many old frames to be more efficient. Does anyone know of good literature from across the pond? I guess that weather conditions in Europe further inland would be fairly analogous to the north eastern US.
As far as the infill material... It seems to me that using a SIP might be less likely to cause problems than a brick or stone infill. It seems like they might be likely to condense moisture in a heated house, like Mike pointed out. If I use a SIP, the plywood facings would be inserted into grooves in the timbers. At least that would be wood on wood.
I am also looking into the possibility of using black locust for the timber. Now that would be a timber what would last a spell !
Perhaps half timbering doesn't happen much over here because we're just not used to it. It would be interesting to get some more European input to see what the comfort level is.