XBox. New to the game @ 50

I know thess questions have probably been asked B4 but I recieved an XBox from my 2 daughters for Christmas and want to know a few things about it.
I see there are USB ports on it. What I want to know is if an external 500 GB hardrive will work on it and if so, then how? I connected the Ext HD and a USB flash drive but a window slid open Titled Storage space but only listed the onboard 60GB HD. (actually 48GB’s) Not even a hint of the other things I connected to it. Is this because I lack a software update or just that they wont work at all on it?
Some say a chip is needs to be soldered on the ciruit board to play back-up copied games. In these times of cracking and hacking I would think a software program encrypted on the game DVD or ISO Image would solve that, but what is this best & where can I get it? If I can. AND… What is the best DVD brand to use, that is going to give the highest percentage of successful copies?
I have rebuilt both desktop PC’s & laptops but have’nt disected an XBox yet and don’t know what the DVD drive looks like. Can I replace the DVD drive (which only reads) with a DVD-RW/CD-RW typicaly used for a laptop, or are the XBox components specific to the XBox console?
I bought a used game from Gamespot(or was it Gamestop) whichever) and when I went to play it, I got a screen saying that I needed to goto a website and update my system in order to play the game. It was a Need for Speed game , I forget the version right off hand, but in order to do this do I have to be connected to the internet and XBox Live or connect to my PC via an ethernet cable , to the website? And do I need a program for that too? I mean to connect the two together?
Fifth & FINAL.
Back to a hard drive question. As I said, I have the 60 GB and have’nt opened it because of the “Void warranty” issue. A hollagram sticker over the screws has halted that attempt so I’ll ask here. What type of hard drive is in it? Is it IDE or SATA ? Can I replace it with a larger one like a 320 + & download the software or is all that specific to the console with a format that only the manufacturer does?
I ask this because of the rediculous prices of these things. If its possible I’ll put a 320GB in it for half of what they sell the 120GB for. I mean anyone can remove 4 or 5 screws & a plug.
Like I said, this was a gift from my 2 daughters & in my eyes 300 bucks was a lot for them to spend on me. As a matter of fact I got it this past Christmas and only used it for the first time on the fourth of July a week ago and because I don’t use it much I can’t see spending all sorts of money on it if I don’t have to, and I’ll do my own programing,copying and harware updates myself if it’s possible.

So there you are. This is my first post here and appreciate you reading this as well as any and all help you can give in websites to goto , names of software & what’s inside if you know,so I don’t have to pull it a part just to see I can’t do anything with it.