It won't let you run unsigned code. Unsigned code is more along the lines of homebrew. The project to run unsigned code is ongoing with the 360. It was possible for a time to install Linux on 360, before Microsoft patched the 360 kernel to stop the exploit. It is still possible, if you can find a 360 with an unpatched kernel. That would be difficult, to play any newer games, an update is required, once the update is installed the kernel is patched and it is no longer possible to use the old exploits to run unsigned code. The original kernel patch was applied about 1.5 years ago.
Flashing your 360 with the Xtreme or iXtreme firmware will allow you to play backups. The Blaster 360 is a device which installs internally, allowing you to flash your 360 with the Xtreme or iXtreme firmware without dissembling it each time. Flashing the 360 by conventional means involves dissembling the 360, connecting it via SATA cable to a compatible SATA chipset on your PC, and using dos/booting into dos and entering the proper read and flash commands. The process is different depending on which DVD-ROM drive came with your 360. It is only necessary to open the 360 once to flash it, but if you wish to update to the latest version of the iXtreme firmware each time a new one is released, the Blaster 360 will save you from opening the case each time. It's down to user preference, for my money, the Blaster isn't something that's worthwhile.
For information on flashing the 360, check here:
Xbox 360 Quick Links