I've been trying to read up about it General. Apparently it should upscale or do something to that effect because you have to download the game settings or some weird thing like the guy above mentioned. Not all games are backwards compatible which sucks, but some good ones are, plus- I think yes you do have to connect online to get the update software to even use backwards compatibility.
Me and the Wifey just bought a 360 ourselves yesterday, wrapped it up for Xmas though. I'm mad, I was ready to play me some burnout revenge and some perfect dark finally lol. Oh well it can wait. We're also going to be getting a Wii once we can find one dammit. We've been searching for 2 weeks now or so but caved and figured hey, get the 360 now and after Xmas when all of a sudden there's 5 billion Nintendo's worldwide, we'll snag one then =)
I can't wait to bust out some old school mario games and everything since you can download their games offline. That's the coolest!