You can buy a HDD to slot in the top (easy fitting dont worry just slides on top).
The Arcade version is effectively the old Core system, which is an xbox 360 without the HDD. This means you need to buy another HDD from ebay or somesuch, or use a memory card that plug in the front.
Equally the arcade version comes with a few games from XBL arcade. And I think, but am not sure, that you need a HDD to be able to download more arcade games and you definantly need one to download demos/movies/addons from XBL.