Suggestion:
I think we need to clarify first what you actually connected. Is it a thumb drive or other usb drive that you plugged into one of the usb ports? Or is it an actual genuine MS harddrive (either the one that clips into the top when standing vertical, or the one that goes inside on the new slim model)? Here's a pic of the standard xbox 360 harddrive:
http://www.amazon.com/Xbox-360-20GB-Hard-Drive/dp/B000B6ML32
If it is a thumb drive or other usb drive, nope, that won't satisfy the requirement of a harddrive for the xbox. It considers that a memory unit, not a harddrive.
You need the harddrive for some games, and especially for the backwards compatibility to enable playing (most, not all) original xbox games. Some 360 games* also require a harddrive.
* Halo: Reach for example, where you need a harddrive to enable file saving/sharing and theater playback
EDIT: I noticed sdfg thinks the 360s won't play original xbox games, so far my experience is that it plays the same ones the basic 360 does, they are really the same console for the most part

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