This is from xbox Live:So if I don't need the hard drive, why should I buy it?
Even though most games do not require the Xbox 360 Hard Drive, it saves you money in the long run. For one, you need something to save your game progress. Right now, there are two options: the Xbox 360 Memory Unit (a portable 64MB flash memory card) and the Xbox 360 Hard Drive (20GB of storage).
Without one of these devices, you'll lose your game progress every time you turn off your console, you can't tailor or customize your Xbox 360 experience, and you won't be able to download and store content from Xbox Live.