Passthrough mode means your system works just like it does today. Emulation means your disk tray will not work, but instead will emulate the disk tray operation using a portable harddrive. This allows you to play games from the HDD as if they are loaded into the disk tray. You can switch between these two modes as needed.
Pass-through: Works as if the cobra is not installed (ie the same way it always did before).
Emulation mode: the disk drive is emulated by the cobra, so the real disk drive doesn't work but you can load games from an external harddrive using the cobra manager.