yes it does. some people load roms from their pc so they don't have to keep using ftp. ravnos was probably referring to both methods since they go over the lan. it has an optical drive too

unfortunately the earlier ones can barely read regular xbox discs, let alone anything recordable.
if you can't find a modded one, get a regular one and mod it. they are cheap and plentiful. unfortunately a good modchip will cost at least $60. if you've never soldered then get a solderless chip, but bear in mind that you have to be very careful moving your xbox around, or you will find yourself having to reposition it.
pros: can do many psx games well and some n64 games.
dosbox seems good, though i haven't tried it yet, or mame for that matter (will soon).
earlier home consoles are mostly flawless.
i like the xbox controllers, having a wireless one is great, and a modchip bios will let you shut down the system from the controller.
cons: ok, this is a pretty weird one: i have a 720p hdtv with three component inputs. one takes 480i/p. the other two are 480p and up. the xbox dashboard, bios screen, and program menus can output 720p, and they look great. but in all of the emulators i've used, output is 480i, which means i can't use 720 for anything. so, a weird issue that probably won't apply in your case.
but be warned: the machine is pretty loud.
via is making some cool, very small form factor mobos that have onboard ram + cpu, which goober linked above. it depends on what you want to play and how much you are willing to spend. i personally think the xbox is nice because it costs less than $200 for everything, lets me keep the 8 & 16-bit games in the closet, and even though it's essentially a desktop PC, there's very little PC-ish things you have to do with it once you get it set up how you want it. you just turn it on and go.