This new hack circumvents the Xbox 360's internal restriction of only running signed code
The hack exploits a vulnerability in the console's operating system kernel, and uses a privilege escalation to switch into hypervisor mode. In this mode, any unsigned code can run—including alternate operating systems such as Linux—with full access to the 360's hardware.
The exploit only works on versions of the kernel between build 4532 (released October 31, 2006) and build 4548 (released in on November 30 of the same year).
While the exploit would theoretically allow any code to run, including another OS such as Linux, nobody (as yet) has demonstrated this on an actual 360. As the number of machines capable of being exploited by this hack is extremely low, it is doubtful that Microsoft is too worried about the exploit having an effect on Xbox 360 game sales.