Did Microsoft rip me off?

It's the backwards compatibility emulation stuff. It's all software based because IBM own the rights to the guts of the original Xbox so Microsoft couldn't just do a hardware solution like Sony did at the beginning of the PS3's life.
 
Actually, I think it was because NVIDIA provided the hardware for the original Xbox and Microsoft switched over to ATI for the Xbox 360 so NVIDIA refused to allow them to use their hardware for backwards compatability. The original Xbox didn't really have any IBM parts in it...it was really all off-the-shelf components that were modified like the Intel Celeron Coppermine core based CPU and the NVIDIA NV2A GPU which was jointly developed by NVIDIA and Microsoft.
 
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