The hardrive basicly-
Saves your gamertag (the little account you first create which stores info on your gaming achievments)
Saves music from a cd or MP3.
When you play games online sometimes you will get updates for the game (which are compulsory to download if you want to play the game online). The updates are basicly things which either add things to the game or improve the game because sometimes it may have "glitches" (games are thouroughly testes by people before release but obvioulsy they all cant be picked up until they are played by millions of people)
Games sometimes bring out downloadable content, things like new multiplayer maps, characters etc etc. One game I have in particualr is Ghost Recon 2 and that has two downloadable map packs and a extra weapon pack and that alone takes up 3.5 GB of space on my harddrive (dont panic though, not all games take up that much space)
You can download films off xbox marketplace, to do this you need to buy microsoft points. Once downloaded you have a month to view it and once you do start viewing it you can only watch it for a 24 hour period.
There is no option to download films onto your hardrive from cd or other sources BUT!!!!!!!!!!!!!
If you have windows media center on your pc then you can link up your xbox with your pc and stream photos, films, music etc etc. Which then can obviously be viewed/listened to through your television/sound system.