Did you put the second disc in after installing the first disc? The second disc is the "game" disc. You don't install it (you can actually, but I didn't), you just put it in and play, but you have to install the first disc before that.
I have an old XBox too, so I bought a 16 GB flash drive. Works fine.
I still haven't done a whole lot but explore. One thing I'll say is you really don't get a pure sense of how big and amazing the world it is until you steal a plane from the airport. The city is huge and it takes a while just to fly over the entire map. Also take a dirt bike up to the "Hollywood" sign (its like Vinewood or something) at night and look out over LA. Graphics are really good.
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