If u have a "new" HD it's not locked yet. U will have to do that when u finish building it with xboxhdm option 1. U can use option 3 to lock ur HD if u burned ur eeprom on the CD also. The HD needs to be locked with YOUR eeprom in order for the MS bios to boot from it.
And yes u can completly set up the HD on your PC, all u need is the content of ur original (softmodded!) C: drive. Though my advice is to also put the hacked savegame on E: for recovery in case u fuck up afterwards.
