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For more on marking an answer as the "Best Answer", please visit our FAQ.you need the FREE silver or PAY FOR Gold online subscription and hard drive to allow emulators or patches to be installed via xbox live to allow all your games from the original xbox to run. The idea microsoft has, is to be able to play every single game from the back catalogue of titles but after seeing how a small few of PSOne games are not now able to run on the slimline PS2 and Sony finding it difficult to overcome issues, Microsoft arent guarenteeing every title as a form of covering themselves. They are merely stating they intend every single top selling title to run and then work towards complete compatibility in future. This is because they see top selling titles they can keep reselling to new Xbox360 users (Halo 2, Forza Motorsport etc) as good revenue and older more obscure titles such as Crash and older FIFA games etc as unlikely to be wanted nor bought in the future so the development costs of designing and programming an emulator for these titles are an extremely low priority. Its all down to having a budget to spend allowing old games to play and choosing the most popular ones with some shelf life still in them first!
The reason of the need of emulators is because of the different chips and hardware between the two machines. Sony managed it with PSOne to PS2 easily as they were using the same sort of hardware but more powerful versions of, whereas Xbox and XBox360 are totaly different in every way so needs to use emulators and programmes to make them work with new technology. PS3 will be having the same problems as Microsoft and will use emulators as well.
Dont expect their to be any major difference to the games using this extra power. Microsoft says that there wont be any graphical changes or updates to games that are emulated. They will be exactly the same with maybe the exception of a more stable frame rate.