I'm really looking forward to picking up a 360 sometime soon.  However it seems the Arcade isn't BC due to lacking a HDD.  So the question I have would be this.  Adding a HDD to the Arcade, does that enable BC.  Can it be ANY HDD or does it have to be a Microsoft one?

Really? Didn't know that.

Your HDD has to be from M$, but I am not sure about the BC

The BC is software you can request discs directly from microsoft for your 360 even. All you really need is the HDD for this compatability so yes buying one will allow you to use the consoles BC  http://www.xbox.com/en-US/games/backwardcompatibilityfaq.htm

Yes, I have an Arcade and I bought a hard drive, and BC works great.

Can it be ANY HDD then? Or is it a requirement to be a Microsoft certified one?

Bah, just called the customer support. The agent said it has to be, but I've got an inkling that he HAS to say that. :b More research! FORWARD HO!

You need microsofts own HD which cost an arm and a leg. if you want a HD then the arcade is not for you , get a PRO.

I have several arcades and just take my 120 Gb hard drive I got from my elite and put it in each to play whatever game I want...

It is BC with the hard drive without any issues...

The guts of all three consoles are the same... IT is only the bundled accessories and hard drive that are different. Unlike that other vendor that sells you something that cannot be upgraded even if you wanted to.

 It's actually cheaper to buy the Arcade and a separate 20-gig hard drive than it is to buy a Premium package surprisingly enough lol.

Yeah, they weren't lying, you need a Microsoft-brand hard drive.  For some reason, the 360 doesn't let you save stuff externally (you can only stream music and videos from other hard drives).