
If you are using a method other than a mod-chip which you can actually turn off, you're screwed. I've been going on Live for about two years with the same modded Xbox and haven't gotten banned, so don't believe any rumors you've heard about getting banned, as long as you turn off the chip, you won't get banned, period.

I'd also recommend only keeping the Live account on the memory card when you connect, and not actually copy it to the HD. That is how I always connect to Live, and there is no account on my HD.
