Magic Engine is a PC only emulator though I am sure there are PC Engine emulators for Xbox, MAME is also on Xbox but it is based on old versions so there will be games that will work on PC but not on Xbox
32GB is a bit small for a XBOX HDD replace, I was running low on space with a 120GB drive I found that my 750GB drive was maybe a bit too much though but with a few of the recently modded emulators they can take up alot more space especially if you have all the art packs ect
For soft modding anyway 2TB drive has little use as you can not access all the space, I can't be 100% sure you can with 1TB anyway due to the Xbox HDD format limits
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