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256MB should be enough for the emulation software and saving a few games.
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If it were being used for nothing else, sure. Except you're overlooking one significan change to the Xbox 360 that happened recently: the New Xbox Experience. The NXE requires a reasonable chunk of space to store the various files/database stuff that makes it so much faster than the old dashboard. The minimum requirement is, I believe, 256 Mb of space, which is why the Arcades now come with that as standard.
And whilst a HDD isn't required for many games, it's very much worth having for nearly all of them, especially when you start thinking about things like add-on packs and other downloadable content (some of which can be had for free or very cheap). It just doesn't make sense not to have the HDD really.
As Skills said, if you can try and take back the Arcade and get it swapped over for one with a HDD.
How ya doing, buddy?