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Backward Compatibility On the 360
The Xbox 360's backward compatibility is software-based, which means that in order to play original Xbox games, the 360 must run an emulation program, allowing it to behave as if it were an original Xbox. The need to store the emulation software is one reason a hard drive is required to play original Xbox games on a 360.
Hardware Differences
Another reason a hard drive is required for backward compatibility on the 360 is that the 360's hardware is radically different from the original Xbox. The memory units of the two systems are incompatible with one another. Original Xbox games running under emulation cannot access 360 memory units and can only be saved to the hard drive.
Pros and Cons of Software Emulation
The Xbox 360's software solution for backward compatibility has advantages and disadvantages. Among the latter are confusion over which games are backward compatible, and glitches in the software that cause some games to run in a substandard manner. The main advantage is reduced cost, as hardware-based backward compatibility requires the inclusion of extra hardware components that are costly to manufacture and drive up the price of the console.