yes, the drive is recognized by WIndows XP automatically
if you want the ability to copy files from the disc to the HDD and payback DVD's i believe the best solution is the newest version of Power DVD, version 7.2 i believe
To playback HD DVD movies on a PC you'll need PowerDVD Ultra and a pretty beafy CPU and RAM. If you do Windows Update you can get the drivers for the HD DVD addon to work on PC.
The HD DVD drive is reconised by windows for movie playback straight away, however a 3rd party piece of software is required for for playback - be careful as HD support for things like WinDVD and PowerDVD is fairly new. The update that is available from MS is optional in that it just allows it to be seen through explorer and the file sturcture can be read as well (you could, in theory, use data disks with this, if there were any).