Just my 2cents - Average game size may be 1.34 gigs, but some are MUCH bigger - in example- genma, street hoops and fifa soccer are over 5 gigs ( dual-layer dvd's) - shreck, crazy taxi, cel damage, fusion frenzy would all fit on a cd...and pac man is only like 3 megs....
If you've got a dvd burner, your answer may be different than if you don't - I really enjoy the convenience of having everything in the box, and not having to stuff dvd's in all day, but if you only keep your favorites on the hd, then 40 gigs may be plenty ( don't forget, you can use the xbox music partition for games too - so with a 40 gig drive, you'ld end up with like 35 gigs available - should be plenty if you want to have the "top ten" on the box - I would say that 89 games is optomistic for a 120 gig drive though -
The good news is that you can change your mind - and install a bigger hd later if you need more space, and we all know, they'll only get cheaper...
Don't foget, there's rumors of another price drop on xboxen before christmas - I'm already seeing lots of offers with $30 in free stuff if you buy a box - ( 5 free rentals at blockbuster, or a dvd kit, or a backpack at other retailers) - it wouldn't be much of a surprise to see the boxes at $149, and its possible they'll be $99 - if that happens, you could buy a box, chip, and 120 gb hard drive for less that just the box cost a year ago... and don't forget, the first people to buy a box had to buy 2 or three games with it...
let's see,
box #1, games with titles a thru g... box #2 games with titles g thru z, box #3 for rips and homebrew software, exclusively, with a pc-dvd drive... Box #4 for live... Box #5 runs windows... network them all together - and run a linux boot disc then you could help seti @ home to find intelligent life in the universe... and the total project cost (hardware-wise) lower than $1000..... hmmmmnnn.....
Good luck!