I'll definitely look into the HDD. It won't be used for media playback (have a htpc also running xbmc for that) but even so the games will take up plenty room.
By the way I noticed something interested over the weekend - I bought Sega GT2002 for £1.50 on Saturday but when I got home it wouldn't run. It started to load then crashed. So I tried it in the 360 downstairs and strangely enough that worked.
I couldn't work it out for a while but eventually realised that disk space was the problem. Cleared out those stupid unpacked rom files (see other thread) and it started working.