with the 4gb you can play on-line but saving games and updates for games sometimes doesn't work. Battlefield 3 for example has a 2gb update and a 4gb xbox won't let you put that on there.
Yes they are super easy to upgrade to the 250gb harddrive. Any gamestop or bestbuy will have them for sale. I think they run about $110.
Another upgrade option that is cheaper, but somewhat more technical is finding an old xbox harddrive and putting it into your new xbox. There are a ton of tuts on how to do this on youtube and it DOES work. Both the old xbox harddrives and the new ones are just a sata connection. The only difference is the case on the new ones, but you don't have to worry about that. You can use a small piece of foam to secure the old haddrive in.
Just don't get a transfer cable and hook it up externally as this will reformat the drive to fat16 and put it into 16 Gb partions and not be able to work as an xbox harddrive. (they use a special format for the xbox haddrives FatX that only microsoft can do at this point)
Hope this helped, let me know if you have any further questions.
Buy the new slim that came out about a year and a half ago, its breathes easier, has WI-FI, and I think it's guaranteed that It wont get ReD ring, I played on mine for hrs when I had it and it never messed up, though sometimes after playing for like 6hrs it would freeze, but then I just restarted it, then it was fine (this was also after having it for 6months or so playing all the time)