You can still use all the features with Arcade. The main features you will miss are any DLC and XBL Arcade games.
Just get a used harddrive like you said, should work.
You seem to be heavily RPG adventure favoured like me so Ill say you got almost all of the best in your list. Ill recommend adding Star Ocean TLH (releasing in PAL on June 5), Kameo and Oblivion. You mentioned RE 5 so I think youd like Gears of War 1&2, Halo 3 and BioShock for starters.
Check my list in my sig for more ideas. ;)







