yes, it needs to be flashed with custom firmware.
the most current version is "iXtreme v1.6".
although there is something new on games that will eventually force you to update your firmware and they call it 'wave4' which was just recently found on a game called 'Cars etc etc' (i dont recall exact name off the top of my head) which eventually, in the near future, all games will eventually use this just like what happened with wave3 about a year ago. there is firmware currently being worked on (i.e. iXtreme v1.61 etc) that will allow you to play these games properly. but the temporarily fix for this to FORCE the system to load the wave4 games is to use the 'activate.iso' file. but using this is NOT safe on XBox Live etc etc.
WARNING: DO NOT attempt to flash that to the XBox360 until you know what your doing!!! (because if you 'erase' or 'write' to the XBox360's DVD-ROM drive and you do not have a backup of the firmware on the drive, which contains your drive key (WHICH IS VERY IMPORTANT), your XBox360 will never be able to play backups or even originals on the system anymore. basically the system will be useless to you and only work as a dvd player from that point forward.