Is it possible? So I can hold a LOT more stuff?

Of course it is. It's by far the best way to go too. Have it install XP SP2 unattended, office 2003 SP1, and all your other usual software, configs, tweaks and everything. You never look back

do a dvd-rw so it can be updated!

Yes, that's what I use also. Most testing with VMWare, then once it seems to work fine I burn it on a -RW. They've come down in price a lot and they're handy. There's new versions/builds coming out every month of just about every program mine installs, so it's definately worth it

Is it possible?

Yes, the method of doing it is the same as for a CD.