One of the factoids missing from the 360 specs is backwards-compatibility. The bottom line seems to be, no one
knows. Not even Microsoft. The details of exactly why this is so tough aren't clear yet, and we don't expect them to be
clear until we're closer to launch.
Would it be so awful if they didn't pull it off? As Engadget says, it would be a marketing disaster. But would fans care? Personally, I do. My den is filled with enough plastic boxes already. I don't like the idea of another one. If my PS2 can be replaced by my PS3, and my GC can be replaced by my Revolution I may wait awhile for the 360.
The (probable) worst case scenario is MS releases an add-on (after launch) that allows you to play Xbox games on Xbox 360.