Free Dreamcast Development System Started
I think you should look into the history of the "demo" scene for the PlayStation. The basic hardware tool used by the demo and independent development groups (some of these developments included pretty decent full-fledged games) was just a GameShark (AKA ProAction Replay). A device made by Datel which existed just for the purpose of entering simple codes into games for cheating and such.
The beauty of the GS/PAR is that it had a DB25 serial connection that allowed it to easily be linked with high-speed serial communication ports on the PC (such as the 'CommsLink card' that is talked about on the Hitmen site.
Some very enterprising hackers wrote alternative ROM sets (the ROM was flashable) for the GS/PAR that made such a setup a REALLY good development environment, including step-debugging! When you can link such a 'cheating/patching' card to a PC and have good software control on the PC side, you can do nearly anything. It makes it easy to upload data (which can include code) into the system, do a system soft reset, and viola, you are running custom code that could be whatever you wanted, on the console system. There was even two way communications such that you could 'load' datafiles off the PC for your demo/game as if they were being loaded from the PlayStation's CD.
When paired with good development tools on the PC side (like a leaked copy of SN System's PsyQ compiler system, or even just the gcc toolchain which was released as part of Sony's own Yaroze program) this made an excellent development system that was capable of doing a lot more than the simple hacks and patches you mention.
This Dreamcast setup sounds very similar, just with everything custom-made.