The real way to look at it is that it's $100 less for the "core" pack, not $100 more for the premium.
The hard drive:
is used by games to store temporary data for quicker loads (think of it as a temp install that's done in the background while you play)
saves the games right to the system. Without it, you'll have to buy their overpriced memory card, which is an even worse deal than their overpriced hard drive.
is used to download anything (games, demos, game additions, etc) from the XBL marketplace.
is also [i]required[i] by a small number of games
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