I'll poke my head in here and give a plug for softmodding.
While the hardware mod can be a lot of fun, from what I understand of the technicalities, softmodding can do it all just as well, as long as someone has written it. The big deal breaker is xbox live, that's where the softmodding gets into trouble areas. I think the chips are better featured because they make people money.
I've got a 200 gig drive in my xbox with a softmod, it's very handy having everything on the HDD. I also have a softmodded xbox in my arcade machine. They get used mostly for emulation, gaming, and occasionally some video/streaming. (MAME first, then sega/snes/2600) Rarely xbox games anymore though I own a bunch. I've had a lot of fun re-playing out of this world (PC port to the xbox) on there as well.
Best of luck, keep us updated on how it works out for you. =)