In my opinion Oro lost an arm to Itachi. Then he transfered into a new body. I believe the jutsu Oro uses to regrow his arm was created by him after this event made him realize it would be handy.
Also with the whole Orochimaru being sick. This could be because like was mentioned his soul was sealed with Shinigami's technique. Not his whole souls but like mentioned the soul in his hands. So this is what makes me believe why he was in such bad shape. The body rejected the soul so much more completly because there was less of it.
Also the body that he takes over. The soul becomes part of his own and stays with him.






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