basicallly you can update XBMC (as far as avalaunch you can update that to although it's rather outdated now even with it's newest version) ... all u have to do is connect pc to xbox with a crossover cable (although if u got a router it's easier/more convenient) then ftp into it with a ftp client such as FileZilla (which is free) and transfer the XBMC folder to something like E:\APPS\ (NOTE: if old version is there DELETE it first BEFORE transferring in the new version of XBMC... also it's a good idea to delete your SAVE files for XBMC to, especially if it's a very old version of XBMC) ... also make sure when you transfer the XBMC folder to the E:\APPS\ folder that once it's transfered you did it correct... heres what it should pretty much look like if you did it right... "E:\APPS\XBMC\default.xbe" ... cause if that default.xbe file aint listed in there odds are your current dashboard wont see XBMC as being installed.
here's a good link to help u network your xbox to pc etc...
http://www.chefelf.c.../networking.php (thanks to moderator Xombe for this link)
as far as removing the modchip and doing a softmod... it depends, but generally speaking YES you can.... but if u got a upgraded hard drive in it and it dont support "locking" then you basically cant softmod it, since a softmoded xbox needs a lockable hard drive where as with a modchip you can use ANY hard drive you want to.... but if your still using stock hard drive then YES you could remove the modchip and softmod it although i dont really see why you would want to since a modchip is generally better than a softmod cause if something does happen to go wrong it's easier to fix the xbox with a modchip then with a softmod only.