When NEC releases new firmware for the drive I would recommend updating, since it usually increases the quality of your burns and on rare occasions gives your drive new capabilities (like the 3.04 FW for the 3520 gave this drive PIE/PIF scanning capability).
As for modified firmware: they add features like RPC1 (=regionfree drive), riplock removal, bitsetting and/or overspeeding, which aren't necessary for getting a good burn, but I find them very handy. On the downside, using modified firmwares does void your warranty, but IMO that's not much of a problem, since the warranty is only 1 year and I expect my NEC to live longer than that.
If you like to go with a modified firmware, I would recommend to using Liggy & Dee's 1.W5 FW, which next to having the four previously mentioned features also increases burn quality with some media.
Read the Big NEC F.A.Q. for more info on modified FWs.