To answer your questions:
The xbox ports are little more than glorified USB ports, you can make an adapter by opening up the wires on the xbox cable and a USB extension cable and soldering like coloured wires (you will be left with a yellow wire, leave it connected to the xbox). You can stick a few USB devices into them but they have to be the proper USB spec (a fair few use other specs or twisted versions of it that work on PCs but not on the xbox) and I think it was 2 gigs that is the limit in size.
Hard drive: my opinion on drives is whatever space you have you will use.
Yes you can copy retail games (the might even work better than they would from the disc). In my experience good xbox games hover around the 2 to 3 gig mark but some are far higher and others lower. You can also rip videos and whatnot from the games.
Normal scene style xvid videos look great on a standard def TV and even NTSC is not that much lower than what passes for high definition these days. I tend to encode videos I make myself slightly bigger though.
Audio: just about any format you care to have can be played so I leave that to you.
Homebrew: emulators have roms and I will leave you to decide how big they need to be for that. Complete older sets are not that much bigger than xbox games leaving the big games in the form of PS1 and N64 which brings us to the next question.
PS1 is good (probably in line with the PSP after some fiddling) although you need isos and N64 has many playable games if you are willing to fiddle with the options a little bit.
XBMC themes, I have not really played with the PC versions of xbmc but there are many great themes on the xbox version (the PC stuff came far later in the life of xbmc remember) and I have all manner of scripts for everything from IRC to updaters to trainer downloaders to proto web browsers (site specific stuff) to rss and beyond.
Networking, I should have you note that streaming via network is very well developed for the xbox version of xbmc and if your wireless is wireless g you should have no problems using your PC (wireless b can happily do music but it might choke on some video if you do it in real time). Standard windows file sharing (SMB which is also available via the SAMBA application in unix style systems)
From what you describe you have a little box from the ISP which is hooked into router/hub/similar that is probably providing all the addresses and most of the network functionality.
Regarding the crossover cable it will work but most modern network hardware (wireless is somewhat modern) does not require one, many guides are generally written when the xbox first appeared or are rehashed from them when the older style hardware was less common).
I know you did not ask but I will mention it anyway the xbox DVD drive is a fairly cheap and nasty thing but you can replace it (it is not such a nice thing to do but it is easy enough) and if you know how bit setting works you should be good:
http://www.xbox-linux.org/wiki/Xbox_Linux_...D_Burning_HOWTO
As for how to Blake1710 has already taken it but I will go a bit more in depth. There are many guides around here and places like
http://www.xbox-scene.com/tutorials.php
1) The xbox hard drive is locked as standard (locking a somewhat rare part of the IDE spec, more on that after the methods), it does however unlock for a time after you power the xbox at which time you can yank the cable and plug it into your PC. It is not designed for such a thing but it can be done and is done quite often and is otherwise free. For all intents and purposes this is a softmod.
2) The conventional softmod requires one of game and a way to get a hacked save file onto the xbox; you can use a memory card or you can use a USB drive with an adapter that I described above.
There is PC software for the task (both USB and memory card readers like those from datel) or if you know someone with a hacked xbox you can have them transfer it for you.
3) Chips are twofold: one is the actual chip and another is the TSOP flash. Both require you to open the xbox and the TSOP flash involves you soldering/bridging connections and only works on the older xbox models.
I mentioned locking on hard drives: it is a fairly rare thing and because of that some drives do not support it. The locking is checked before softmod is loaded but chips and TSOP bypass it hence softmods needing a drive that can be locked.
There is no danger in trying to lock the drive as it either will or it will not. The only thing I will say is note what key you use to lock it for if you do not know the key you gain a brick for a hard drive unless you are exceptionally lucky and the drive has a master reset code (the data will be lost but the drive will not be).
You will need to unlock the stock drive as well for which you will need your EEPROM dump for, most softmods have a fake EEPROM if you try and read it but dumping it is part of the softmod and you can use a tool like liveinfo (I mentioned it here:
http://gbatemp.net/index.php?showtopic=155701 ).