Flashing your drive won't physically damage it, but if you have a bad flash (like a power cut mid flash) then it just corrupts the data in the flash rom so the drive won't work, in that case re-flashing the drive may recover it.
Ripping with a DVD-ROM will usually be quicker so if you have a DVD-ROM as well as the NEC then don't worry. The only other reasons to flash new firmware is to add more media codes for new media, speedups for existing media, region free, riplock and bitsetting. As for the quality dropping by ripping with the NEC, well that sounds unlikely. If you mean 'burn quality' then that is down to the media used, if you mean 'picture quality' then that depends if you are making a DVD-5 from a DVD-9 and have to loose some of the Video/Audio quality by re-encoding it to fit it onto a DVD-5.
Bittsetting just alters the booktype of a blank DVD+R/RW/DL DVD to say 'DVD-ROM' which is the booktype for a factory pressed DVD like the DVD movie you buy in a store. Some DVD players will only play DVD's with a booktype of DVD-ROM so bitsetting is used to make a burned DVD playable in those type of players.
I've flashed the official 2.18 f/w in my 3500 as I use my Plextor DVD-ROM to rip movies and that f/w also let's my Prodisc R03 media burn at 12x so I don't personally need modded f/w.
You can try the latest Quikee and Liggy/Dee f/w but make sure you read both threads to understand if those f/w's do what you want!