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I helped my brother mod his xbox. It was a while ago and my memories of it have faded since then. Also new stuff comes out all the time and things change but I'll try to help you out.
First off check out a website called
www.xbox-scene.com. They have alot of great information, forums, tutorials, etc.
Now to your questions.
1. My understanding is that a computer DVD rom cannot read xbox games so it's not as easy as sticking them in the drive and copying.
2. As far as solderless mods go some people hate them some people love them. It's really up to you and if you feel comfortable soldering or if you want to pay money to have someone else do it. In my brothers xbox we put in a Matrix solderless modchip and have not had a problem since the installation (about six months).
I believe that you can play games online but I think with some mod chips you maybe have to turn the chip off. I am not positive on this so you might want to search around before assuming that you can.
3. You can install larger hard drives. I don't know what the size limit is for the xbox but I installed a 120GB in his. It's really cool because to backup the games all you have to do is copy them to the hard drive and play them from there.
4. My brother has never had a game he couldn't backup. One good thing about the xbox setup is that if you do run into trouble it is usually no harder than finding an updated bios on the internet and ftping it to your xbox modchip.
There is alot more that goes into modding the xbox than just getting new hardware. Besides the modchip you have to find and install a bios, install a dashboard, hard drive (optional), and there's probably more I can't think of. It sounds complicated but once you start researching it gets a little easier to understand.
Also, if you would like to burn your games to DVD instead of installing a new hard drive that is possible but I don't know all of the fine details other than you're gonna have to hook the xbox to the computer anytime you want to do that.
Hope this gets you started. Visit the website I mentioned earlier. They have a wealth of information and it's all dedicated to xbox.
~Twinke will rule you
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