Microsoft has signed a deal with NVIDIA to license the company's technology in order to enable backwards compatibility in the Xbox 360, which uses an ATI graphics chipset that isn't natively compatible with Xbox titles.

The question of how to get Xbox 360 - which uses a radically different architecture to the Xbox - to play Xbox titles has been a major problem for Microsoft, and it's rumoured that backwards compatibility wasn't actually part of the original specification of the console.

Indeed, it wasn't even confirmed that the system would be able to play Xbox games until E3 this year, when Microsoft announced that "best-selling" Xbox titles would work on the Xbox 360 - a curious piece of double-speak which the software giant refused to clarify fully.

Following the announcement, sources close to the company indicated that a form of recompilation (known as "transcompilation") would be required to make Xbox games work on the 360, with the resulting patched executables being shipped on the system's hard drive for certain popular games, and patched versions of other games gradually being added over the Xbox Live network.

Speaking to at the time, Microsoft Xbox PR manager Michael Wolf denied that games would need to be recompiled, and assured us that the company had no intention of charging for updates to the backward compatibility service. However, he refused to answer further questions about how the process will work.

Now a report on US website 1up confirms that Microsoft has in fact licensed parts of NVIDIA's technology from the Xbox to allow it to emulate the chipset in Xbox 360, a deal which will see Microsoft continuing to make payments to NVIDIA for several years.

The company apparently plans to emulate the Xbox' Intel CPU on the 360's multiple IBM PowerPC cores, and will now be able to emulate the NVIDIA chip to some extent on the ATI graphics chip in the 360 - but it would appear that many games will still not work without some modification.

Patches for some popular games - or "emulation profiles" - will ship on the Xbox hard drive, and those games will as a result work out of the box. Microsoft is expected to work to get emulation working for other games over time, and will distribute further emulation profiles over the Xbox Live service.

What's not clear is how users without Xbox Live access - around 90 per cent of users on the current generation Xbox, for reference - will be able to update those profiles, and whether Microsoft will ever get the full range of Xbox software working on the new console.

Wolf declined to answer the first of those questions when we put it to him last month, but was more positive on the second issue, telling us that "our goal is to make ALL Xbox games play on Xbox 360, and at launch we'll have a selection of the top selling that will be tested and confirmed to work."