1. Your GB size really depends on what exactly you want to do. If you're just using it for game saves, 20 gigs will be more then enough. If you plan on downloading a lot of videos from the 360's Video Marketplace, you may want to consider the 120 investment, as it adds a huge amount of space which you will need, especially if you download HD Video.
2. 360's Sold After March of 2008 have small hardware change and are less prone to the Red Ring of Death (RROD). The chance is still there, but it's very very unlikely now days, and even if you get it, you can send it in to Costumer Support and they replace your console free.
3. Lag for online play really depends on your connection, and what game you are playing. Certain games take a lot of connection to play lag-free, such as Halo 3, other games take barely any, such as Uno. Your "lag Free-ness" really depends on what kind of internet connection you have.
4. The Xbox 360 has the largest next-gen game variety and overall the best overall rating. Again though, it comes down to what games YOU like to play. Here are some of my personal suggestions.
Action/Shooter:
BioShock
Halo 3
Call of Duty 4
Gears of War 2
Online Multiplayer:
Call of Duty 4
Gears of War 2
Halo 3
RPG: (Role Playing Game)
BioShock
Fable 2
Oblivion Elder Scrolls IV
Grand Theft Auto IV
Racing:
Project Gotham Series
Dirt
Forza Motorsport Series
Family Friendly:
Lego Star Wars: The Complete Series
Lego Batman
Uno
Texas Hold'em
Sports:
Madden 09 Series
NBA 09 Series
Usually any EA SPORTS game, as they dominate competition in the sports market.
5. The difference between Rock Band and Guitar Hero is pretty big controversy right now, and asking which one is better is gonna cue the flamebait even more. I own both and personally prefer Rock Band. I think that they have a better track selection, along with an overall much more entertaining game play. Rock Band is in general much easier then Guitar Hero, and in my opinion this is what makes it so much more fun. I also love being able to sing, play drums, or strum the guitar. Guitar Hero: World Tour is coming out this Fall, but i doubt it will live up to the standard that rock band has set. In my opinion, Rock Band 2 is just more fun, and overall a better game.
Have fun with your new 360!