I bought an Xbox 360 with custom firmware off ebay to play game backups. I've got a back up of Red Dead Redeption, however to play it, it says "An update must be applied to your console to play this game. If you decline this update, you will not be able to play this game. Do you want to apply the update now?"
Strangest thing is, the first time I tried playing the game, it did not tell me I needed to update the software.
What I would like to know is, if I update the console, will it still be able to play backups?
Yes, the update is probably just for the game. Although it could ban you. I don't know how it works when they ban you, like if it updates and then says you're banned. But regardless of whether or not you get banned you'll still be able to play burned games you just can't go online anymore with that specific console.
what ?!? was this a JTAG ?
The problem is often attributed to an error with the ANA or HANA scaler chip on the board near the AV cable connector, which might result from a problem originating with the console's famously heated GPU. In some cases the problem can actually be fixed at home by users with no warranty using a variety of methods which could include the same X-Clamp replacement that fixed (although often only temporarily) many RROD-stricken consoles. Users who receive E74 should also note that this is sometimes due to a faulty A/V cable.
The error code most commonly attributed to E74 is 1022. To get an error code from an Xbox 360 console that is displaying an E74 error (or 3ROL) you simply press and hold the "sync up" button (used to connect wireless controllers) and then press the Eject button for the DVD drive. This will bring up the first digit of the error code (usually it is one light blinking red, which represents 1, please note that four lights blinking red represents a 0, not 4). With the sync up button still held, press the Eject button again and you get the second digit. Do this twice more to get the full 4 digits of the error code. For more information on the error code you receive, or on Xbox 360 hardware problems in general, read this Xbox-Scene forum thread.