I would look at the either the elite or buying the bigger hard disk.
I bought my xbox with the hard disk a while back and I am always down to under 2 or 3 gigs of hard disk space and that is with only a few demos and south park episodes downloaded.
Well that and my 30+ live arcade games.
*Some of the demos can be over a gig (such as the demo for Crackdown).
I am cutting it so close, I will probably have to look at buying the larger hard disk soon.
*I have read some reviews and write ups and it looks like if you have the 20gb hard disk and you make the move to the bigger hard disk the data transfer process is / can be a project in of itself.
But as you have stated, so far I know 2 other people whom purchased the xbox 360 and have yet to buy a retail boxed game. They just stick with all the downloadable content and games.