Yes you would use the mod chip to play your backups and you would need to turn it off to play your originals on Xbox Live.
I wouldnt get either of those drives...personally.
Outpost has some good deals, and your local consumer electronics giant, i.e. best buy, circuit city, comp usa, just to name a few have some really good deals they run on almost a weekly basis. I just bought a 160 gig seagate from Outpost for 50 or 60 dollars after rebate. My PC had an IBM Deskstar, which is hitachi and it didnt last long. I would say Seagate, Maxtor and WD are your best bets, and you should be able to get something with 8MB cache without even trying. If you are patient and keep an eye out you will find some killer deals.