The Microsoft wheel does work with backwards compatible games, but Forza 1 is the only one I have played that works well. The steering sensitivity cannot currently be adjusted on the Microsoft wheel, so unless the game has in-game sensitivity adjustments, the steering will be awkward. Also, the force-feedback effects do not work with backwards compatible games.
However, the Logitech DriveFX wheel is perfect for backwards compatible games. Burnout 3 works much better with this wheel than with Microsoft's. The wheel's sensitivity can be adjusted--I think it has four settings, even though the manual states it only has two, and it produces simulated-force-feedback effects. The simulated force-feedback works very well, especially for Forza 1 and Rallisport Challenge. I remember that some games like Colin McRae 04 were practically unplayable with the Microsoft wheel, but worked fine after adjusting the Logitech wheel.
Xbox 360 games which were not designed with the Microsoft wheel in mind like Ridge Racer 6, Import Tuner Challenge, and Burnout Revenge, also work much better with the Logitech wheel. Unfortunately, Full Auto does not work with either wheel.