Is your Airport Express the first gen 802.11n model (shaped like a MBP power brick)? I have one of these and it downloads an update for it but then says "The selected firmware file is not compatible with this AirPort base station.".
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You can put in a larger HDD into a Time Capsule yourself. I did put a 3 TB one into my (originally) 1 TB 'tower' model (using iFixit instructions). And TCs can backup multiple Macs just fine already.
1) I think the first gen didn't have n wireless, so maybe not included? Mine died a few years ago, but the update worked even for my first gen TC, which I believe does not have n capabilities.
2) Yeah, I've been running Time Machine for multiple macs onto an external HD connected to my (1st gen) TC by USB for years. Occasional hiccups but ones that seem to happen because of TM, not the hardware setup (the occasional create a new backup issue).