xbox 360 backaward compalability

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Trying To update my xbox 360 so i can play all xbox games,when i put the disk in it says 'do you want to update' press yes to enter setup and choose what i want to do,it tells me that it worked after everytime but still cant play xbox games on it.
ive turned the 360 on and off numerous times but nothing..
 
Don't remember any setup last time I did it (though it was some time ago). Blade comes out, you press yes, it downloads and then restarts once done. That's how I remember it being anyway.
 
Does it actually say it wont work, or does it just look like it's doing nothing? If you are using a VGA lead I think there are issues with that.
 
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