Hmm what exactly would be different for online multiplayer?

No mandatory installs with the 360. I'm not sure if the 256mb internal memory now works like a hd or not.

If you are looking for a deal, keep an eye on slickdeals.net or fatwallet.com. Dell seems to be running a 15%-20% off electronics and accessories every few weeks and it usually has free shipping. These coupons work with the 360 as well as other systems.

Well, some games may have patches/title updates that are required to play online. The memory card *may* or *may not* have enough room to hold it. That's why it's generally suggested that if you want to go online with a 360...To get a HDD. It's not required, but you may not be able to play all online games without one.

How much do the HDD's go for anyways these days? 20gb and 60 gb? I'm guessing 20 is enough for the online multiplayer?

 no you need the extra space to install the games in the hdd in this way the load time will be faster and the 360 will be quitter.

My cousin has an arcade and he has no problems online at all.  I know he has atleast 3 or 4 games he regularly plays online as well.  Most patches are very very small so unless you have 10+ games I would imagine no problems at all.  And in the future when you may have a lot of games you can simply erase the update to make space ( I think ).   Map packs and things of that nature will give you fits however, so keep that in mind.

If it were me, I would buy the arcade and then get a refurbished drive through the exchange.  Its cheap and you basically have a pro for a few more bucks than the Arcade.  Only thing is you have to wait on it through the mail.

Xbox.com upgrade: http://www.xbox.com/en-US/hardware/hddoffer/

List price for a brand new 20gb was $80, but I'm not sure it is still in production. (Ebay prob around $40) The 60gb upgrade kit is $100, the 120gb HD is list price ... not sure between $120 -$150. The 120gb HD is on clearance at Target and Circuit City. I believe stock has been cleared at Target, but last I heard it was around $80-$90; CC has them on clearance for $75.

The Xbox 360 Arcade is a good starting place. If you find yourself using it more, wanting to download movies/etc you can then pay the extra $100 for that functionality. You're not paying any more than for an Xbox 360 premium (sans HD cable) and you can spread out the purchase over a longer period of time.

You should look at the games that interest you to see if you really need the hard drive. I'm an RPGer and the Arcade is a perfect fit for that type of player.