I don't know about backup games, the softmod should be able to play them, so I don't know what is wrong there. About swapping the hard drive, if you can lock the hard drive, you can upgrade it. The only problem is when you go on Live for the first time, they log your EEPROM and hard drive serial number. If they do not match the ones recorded the first time on Live, you will be banned.
So basically, upgrade the drive before using Live, or get Xlink (free, and works with any mods!!). If you have already been on Live, you will need to change the EEPROM (Zodiiak sells some unbanned ones in the B/S/T forum, and will help you set it up).
Also, I am only telling you what I have heard, it might not be right. I have flashed my TSOP, and use Xlink, so I don't know much about softmods and Live.