Hard drive is nice to have. Always found memory cards a bit of a hassle. Trust me you'll enjoy it more, all the extra features and so forth. And with the Xbox prices coming down, why not go for it.
Yes, I agree with Gavin.
MS should have included the harddrive as a lot of developers have to "scale down" their games as they have to develop for non-hard drive systems.
I bought an arcade version as it was cheap at the time and it covers more than what I need. The memory units are not badly priced and more than enough space for most gamers. A harddrive makes it easier later on with additional content.
If you just want to play offline and especially now with the price cut down to R2000 the Arcade is a fantastic buy. The HDD is only significant if you want to go online.
Worst case scenario, if you want to go online later you just buy one. Then you have the option of which size as well.